#Issue 3: Crypto-currencies
Hello folks!
Hope everyone is safe and having a good time.
In the last post, we covered some popular applications of Blockchain technology. In this issue, we would introduce you to the world of ‘Crypto-currencies’ - a subset of the larger blockchain application “De-centralized Finance”.
It was an interesting week for FBI agents as they claimed a massive victory in the Colonial Pipeline Co. case - they seized over $2.3mn of the total $4.4mn ransom that CPC had paid to hackers in bitcoin on 8th May this year. Crypto-currencies have now started being used for ransoms and even the intelligence agencies like the FBI are following their trail!
That raises the question - What is crypto-currency? Why is it gaining such traction and exposure now? How Blockchain comes into its overall picture? We cover some of the aspects of the crypto-world here and its internal concepts such as cryptography and hashing.
Even before deep diving into what a crypto-currency is, what do even mean by the term ‘currency’?
Currency
According to Investopedia, ‘Currency’ is a medium of exchange for goods and services. In short, it's money, in the form of paper or coins, usually issued by a government and generally accepted at its face value as a method of payment.
Currency or money has 3 primary functions:
Medium of exchange - E.g buying a pizza (goods) by giving 10 dollars (currency)
Store of value - E.g The above pizza is valued at ‘10 dollars’. In different regions and different times, the ‘value’ of a pizza can be different but its value is stored in the currency, i.e dollars.
Unit of account - Currency must be divisible into smaller units without losing any value. E.g A single pizza costs 10$ but a pizza with a coke costs 15$ - it gives you the ability to compare the prices ($10 vs $15) and is divisible into the smallest unit ($1) without losing its value.
All the popular currencies in the world today are issued by a country’s government. They are highly stable and controlled by those in power.
Hey, so what’s a crypto-currency?
It consists of 2 words - ‘Crypto’ and ‘Currency’.
So, a crypto-currency is a form of currency that uses Cryptography to secure and verify transactions (earlier example, buying a pizza) and to create new currency units. To take note, it’s a digital currency - Digital currencies are different from physical currencies in the sense, they can only be owned and transacted by using computers or ‘digital wallets’.
The ‘Crypto’ in Cryptography
The word “crypto” literally means concealed or secret – in this context, anonymous. Depending upon the configuration, the implemented cryptography technology ensures pseudo/ full anonymity. In principle, cryptography guarantees the security of the transactions and the participants, independence of operations from a central authority, and protection from double spending (Double-spending is the risk that a digital currency can be spent twice. It is a potential problem unique to digital currencies because digital information can be reproduced relatively easily by savvy individuals who understand the blockchain network and the computing power necessary to manipulate it - Source: Investopedia)
Cryptography technology is used for multiple purposes for:
Securing the various transactions occurring on the network
Controlling the generation of new currency units
Verification of the transfer of digital assets and tokens
Securing the various transactions occurring on the network
In the simplest terms, cryptography is a technique to send secure messages between two or more participants – the sender encrypts/hides a message using a type of key and algorithm, sends this encrypted form of a message to the receiver, and the receiver decrypts it to generate the original message.
For understanding, let’s take the simple example of Whatsapp. A user of Whatsapp - say Bob sends a message to Charlie - let’s call it the Original Message (OM). This is sent as plain text - words, numbers, and characters. Whatsapp application encrypts it with a key - changes the OM to a different message, i.e CipherText - let’s call it the Encrypted Message (EM). This is done by using a ‘Public Key’ - a string of random numbers which do a mathematical operation on OM to change how it looks. Just as the EM hits the recipient’s inbox, it is decrypted using a private key that identifies the OM from the Ciphertext and converts it into plain text that the recipient can read. The public and private keys work together to encrypt and decrypt the message. Remember, the private key can only be known to the recipient to decrypt the original message.
Some of the algorithms to create public keys are:
Rivest-Shamir-Adleman (RSA)
Elliptic Curve Cryptography (ECC)
Digital Signature Algorithm (DSA)
Private keys also use the above algorithms which sync automatically with the public keys when generated.
Now, just imagine that the message is a crypto-currency and Whatsapp is the blockchain. The same process gets implemented as explained above where the messages (transactions) are stored in the blockchain ledger (Whatsapp Database) as blocks.
Controlling the generation of new currency units
This process is called mining of crypto-currencies - we would cover it in subsequent issues.
Verification of the transfer of digital assets and tokens
To store, verify and link transaction blocks, blockchain again uses a cryptographic technique called ‘Hashing’. Hashing refers to transforming and generating input data into a fixed size length, which is performed by a specific algorithm.
In a nutshell, a hashing algorithm can take large data, performs calculations on them, and output a fixed length of data. The original data is called input, and the final transformation is called a Hash.
This hash is a unique number that is not duplicable according to the algorithm. Therefore, it is used to verify a block’s authenticity. If there is a change in any of the transactions of the block (changes in messages in the case of Whatsapp example), the hash automatically changes as well. Thus, each subsequent hash is tied to the previous hash, thus ensuring the consistency of all blocks and the transactions in the blocks. This makes the crypto-currencies transactions more secure, open, and faster than traditional currency transactions.
So, unlike any other currencies, a crypto-currency is a digitally encrypted and decentralized currency that is not linked to or regulated by any bank or government authority. And the best part is - it works on blockchain technology!
That’s it for today, folks! Hope you have got a basic understanding of Crypto-currencies and their internal workings.
Don’t miss to hit the ‘like button’ and do let us know what all topics you would like us to cover in the subsequent newsletters.
Want to read and deep-dive more, head down on the sources and references:
https://www.cnbc.com/2021/03/05/chinas-digital-yuan-what-is-it-and-how-does-it-work.html
https://www.investopedia.com/tech/explaining-crypto-cryptocurrency/
https://www.genesis-mining.com/what-is-the-ethereum-blockchain
https://sectigo.com/resource-library/public-key-vs-private-key
https://learn.bybit.com/blockchain/what-is-hashing-in-blockchain/