What is Cryptocurrency?
Disclaimer: At the time of writing, Oxen was known as The Loki Project — this piece has been updated to reflect this name change
Cryptocurrency is a digital asset that can be used for peer-to-peer transactions, without needing to go through a central intermediary like a bank or money wire service. Instead of relying on a central authority, cryptocurrencies usually use a decentralised network of nodes that all share the responsibility of maintaining a trusted ledger of transactions. Cryptocurrency is one use for blockchain technology.
Where did cryptocurrency come from?
Cryptocurrency had its beginnings in the so-called cypherpunk movement of the early 1990s. Cypherpunks believed that the government (and private corporations) had amassed too much control over our lives. To counteract this, they started looking into the idea of digital cash that could circumvent government control. CyberCash and DigiCash were a few examples of these early cryptocurrencies, but both projects had some fatal flaws that meant they didn’t stick around for long.
The concept of a secure, decentralised digital currency first began to be realised in early 2009, when crypto was first successfully brought into the mainstream through the creation of Bitcoin (BTC). Developed by an anonymous person or group going by the pseudonym Satoshi Nakamoto, Bitcoin was the world’s first secure, decentralised peer-to-peer cash system. Bitcoin’s innovative solutions to problems which had plagued earlier attempts at creating a cryptocurrency (such as double spending) caught the attention of developers and entrepreneurs around the world. In the decade since Bitcoin first launched, more and more cryptocurrency projects have been created, further iterating on the concept and adding additional features.
How does cryptocurrency work?
Mining the blockchain
Most cryptocurrencies are based on something called a ‘blockchain‘. Essentially, whenever someone makes a crypto transaction (say, if Alice sends 0.5 BTC to Bob), a record of that transaction is sent to a pool of unconfirmed transactions, floating in the ether of the blockchain network. This transaction won’t be completed until it’s validated (accepted as a valid transaction) by the network. So how does that work?
In a mining-based crypto economy, miners (specialised computers on the blockchain network) constantly compete to solve complicated math problems. The first computer to solve the math problem publishes a ‘block’ to the network. A block is made up of a certain number of as-yet-unconfirmed crypto transactions, the solution to the math problem, and a cryptographic ‘hash’ of the previous block (a hash is a digital signature linked to the contents of the block). This is what makes the blockchain a chain: each block is linked to the block before it by these digital signatures.
Verifying blockchain transactions
Once this new block is pushed out to the network, other computers in the network check that the block contains the right solution to the math problem. If it does, they add the new block to their copy of the blockchain. All valid transactions in that block are confirmed by the network, and those transactions are processed. This is referred to as consensus. If the block doesn’t contain a valid solution to the math problem, or something else is wrong with it, the other computers on the network discard the new block and consensus is not reached. The process then starts over again with a new miner and a new correct solution to the puzzle.
So why is this process called mining? Well, every time a miner publishes a block, and the other computers on the network agree that it’s valid, that miner receives a reward in the form of a certain amount of crypto (the size of this reward varies between blockchain projects). In the specific case of Bitcoin, a miner receives 12.5 BTC for every block successfully pushed to the network. This ‘mined’ Bitcoin can now enter the economy, and every time the crypto is spent, it creates new transactions to be entered into the blockchain ledger.
Why should you use cryptocurrency?
There are several reasons you might want to cut yourself a piece of the crypto pie. Cryptocurrencies — particularly ‘privacy coins’ like Monero, Zcash or Oxen — can be a great way to make secure, private online transactions. If you’re concerned about your online security and privacy, buying crypto (and buying things with crypto) is a big step towards staying safe online. Not all cryptocurrencies are private by design, though — make sure you research the best cryptocurrency for your needs.
Some also see crypto as an investment opportunity, but crypto can be incredibly volatile, with prices skyrocketing or bottoming out in seconds. Tread carefully if you’re looking for a place to invest your hard-earned cash.
If you want to get involved in crypto, a more reliable way to get rewarded for it is to run a masternode or service node, which provide rewards that vary depending on the blockchain project. A big upside of running a masternode or service node is that every additional node makes the network stronger and more decentralised — plus, you get rewarded for helping out.
Another reason to get into crypto is simply to support a particular blockchain project. There are hundreds of different blockchain projects with different values, goals and aspirations — if you find a blockchain project you want to support, buying into their cryptocurrency is a great way to build them up.
How to get cryptocurrency
There are a few different ways to buy and sell crypto online, and each method carries its own risks and considerations. Although there are a number of ways to buy and sell cryptocurrency online, almost all of them involve some sort of cryptocurrency exchange. For a look at the process of buying cryptocurrency, click here.
Cryptocurrency is a great way to make secure, private online transactions using the blockchain. It all started with Satoshi Nakamoto’s invention of Bitcoin in 2009, but these days there are hundreds of crypto projects, each with their own goals, upsides and downsides. You can buy and sell crypto using cryptocurrency exchanges, and you can get rewards in the form of crypto in return for running a masternode or service node.
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