A cryptocurrency is a digital asset designed to work as an exchange medium which uses strong cryptography to secure financial transactions, control the creation of additional units and check asset transfer. Unlike centralized digital currency and central banking systems, cryptocurrencies use decentralized control.
Cryptocurrency should meet the following six conditions according to Jan Lansky
- The system does not require a central authority, its state is maintained through distributed consensus.
- The system keeps an overview of cryptocurrencies and their ownership.
- The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these units.
- Ownership of cryptocurrency units can be proved exclusively cryptographically.
- The statement allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
- If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
- Network protocol: This protocol defines how nodes are connected to each other on a peer to peer network.
- Consensus protocol: This protocol is to make sure that the right consensus mechanism is effectively implemented on the entire blockchain.
- Transaction protocol: This protocol defines the transaction mechanism on the blockchain network.
- Internal state: This defines the internal format of the cryptocurrency unit and its compatibility with other cryptocurrencies
Implementation in blockchain technology
The validity of each cryptocurrency’s coins is provided by a blockchain. Cryptocurrencies use various time-stamping schemes to prove the validity of transactions that are added to the blockchain ledger. In cryptocurrency networks, mining is a validation of transactions and for each successful attempt, miners obtain new cryptocurrency as a reward.
Features: Fungibility (interchangeability) and Anonymity.
Bitcoin is an electronic cash cryptocurrency. It is a decentralized digital currency without a central bank or single administrator, which can be sent on the peer-to-peer Bitcoin network from user to user without intermediary
The bitcoin blockchain is a public ledger recording bitcoin transactions. A communicating node network running bitcoin software maintains the blockchain.
Units: The units of the bitcoin cryptocurrency are Bitcoins. Ticker symbols used to represent bitcoin are BTC and XBT.
Transaction: Transactions are described using a script-like Forth language. When a user sends bitcoins, the user identifies each address and the amount of bitcoin sent in output to that address, and these transactions consist of one or more inputs and outputs. As transactions have multiple outputs, in one transaction, users can send bitcoins to multiple recipients.
Transaction Fees: Transactions paying charges are generally provided precedence over those that have not paid charges as transaction fees are entirely optional.
Features: Privacy, Fungibility, Scalability.