Cryptocurrencies: Introduction

 

A cryptocurrency is a kind of digital currency based on the use of encryption techniques to regulate its functioning. Encryption techniques are indeed used for verifying transactions made, to create the coins itself and in order to determine how the different parts of the system interacts with each other.

We are talking about a proper monetary system in which the agents, traditionally represented by Central Banks and financial institutions, are replaced by the rules itself of the system. Those rules are in turn determined by encryption techniques, so that there is a plurality of agents none of which governs each other.

Here comes the first, glaring and structural difference with respect to the classical, FIAT currencies: cryptocurrencies are decentralised by nature. There is no Central Bank regulating, therefore the currency does not depend on the decisions of anyone. This is a major plus for anyone looking for transparency and security. Once the rules underlying the system have been determined and specified, there is no fear of its functioning being modified and altered according to personal interests.

Transparency can also be found in the rules generally governating cryptocurrencies, given that the defining code is generally open source. Therefore, anyone can understand how the currency operates. Moreover, it is usually possible for everyone to see every transaction made for a determined currency, obviously enhancing transparency.

From a security point of view, it has already been mentioned that there is no risk of anyone influencing and determining decisively the system. However, what decentralisation actually means is not only decentralisation of decisions but also of data. There is not a single real place where data are stored, on the other hand there is a plurality of servers located all around the globe (which are called “nodes”) and which store those data.

Nodes are rewarded for being an efficient and trusted part of the system, therefore the particular rules governing cryptocurrencies ensure that those nodes have the only economical interest to contribute to the system in a healthy way. The interests of every agent of the system are not conflicting, so the health of the system itself is assured along with its security.

What we have described thus far is a system in which transactions are operated in transparency and safety and are stored basically forever, but this is not the end of all pros.  Cryptocurrencies are indeed based on the internet for their functioning, therefore they are accessible from everyone everywhere, with the only need of an internet connection. There is no need for banks and branches and no need for paper money at all.

If that was not enough, cryptocurrencies also offer the advantage of transactions executed with great quickness compared with usual transactions operated by banks. Transactions are usually completed within minutes and with an everyday increasing rapidity, while a bank trasfer can take several days.

We very generically defined what a cryptocurrency is and we pointed out some of the strenghts characterizing cryptos. If we consider that those are still in the early stage of their development, it is clear that potential is there for them to be a main actor in the future world.