What is cryptocurrency?
“a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.”
A cryptocurrency is a form of digital asset generally intended to be used as a medium of exchange in much the same way traditional currencies are. Often they are also held as assets by investors who expect the cryptocurrency to increase in value over time. Cryptocurrencies rely upon the cryptography used within a blockchain; the way in which cryptography is used alongside certain other protocols ensures that these assets have characteristics desirable in a digital currency (security, transferability and immutabillity).
They were first brought to prominence when the first decentralised cryptocurrency, Bitcoin, was created in 2009 by the anonymous person or persons, Satoshi Nakamoto. Since then multiple alternative cryptocurrencies (or ‘altcoins’) have been created and cryptocurrencies have seen increasingly widespread adoption and huge gains in value as a whole. In early 2011 a Bitcoin was worth 1 USD. As at August 2017, Bitcoin trades at a value of 3400 USD per coin.
What is the legal status of Bitcoin?
As Bitcoin has grown in prominence, it has seen greater recognition by world governments. The way Bitcoin is treated under the law varies from region to region. A fairly comprehensive list of the regional legal status of bitcoin may be found here. Many governments are only now focusing their attention on cryptocurrencies and the SEC has recently begun investigatingICOs and token sales. ICOs are described below.
What is blockchain?
Imagine a spreadsheet duplicated and stored on thousands of computers in a decentralised network. Then imagine that this network is designed to regularly update this spreadsheet based on user interactions and in accordance with a well defined set of rules. This analogy should give you a basic understanding of a blockchain. For a more in-depth explanation see here.
The technology extends far beyond just being a means of data storage. Blockchains can be thought of as a set of protocols – a way of doing things – that is enabled through the use of powerful cryptography and computation. These protocols define exactly how interactions take place and therefore dictate how the system behaves on the whole. These aspects brought together constitute a breakthrough and facilitate completely new solutions to previously unsolved problems.
What is Ethereum and Ether?
Ethereum is the most advanced blockchain in terms of it’s capabilities and functionality. It was launched in 2015 and facilitates the running of decentralised applications.
The cryptocurrency directly linked to the Ethereum blockchain is known as Ether. It can be seen as the life-blood of the blockchain and is needed for many interactions within the network.
What are Smart Contracts?
Smart contracts are programs that run entirely on the Ethereum blockchain. Anyone can use their computer to join the network. Anyone can write and deploy code to it and once the program is on the blockchain it is run simultaneously on thousands of computers around the world. The properties and capabilities of the program are decided beforehand by whomever coded it.
Although smart contracts are capable of implementing any sort of program, they are commonly used to issue and keep track of their own cryptocurrencies (Ethereum Tokens), that may be used as part of a greater ecosystem. Other examples of smart contract use include: keeping immutable registries of information, facilitating escrow services or operating betting and banking services.
What is an ICO?
An ICO or ‘Initial Coin Offering’, is a modern approach to raising capital through the creation of a new cryptocurrency – which is usually implemented as an Ethereum Token. Tokens are sold to investors in exchange for fiat currency, or frequently, through a more established cryptocurrency such as Bitcoin or Ether. These coins are sometimes thought of as shares in the newly established firm or are sometimes used in the firm’s specific ecosystem/business model. Investors participate such that they can gain access to the proposed platform or in the hopes that these coins will increase in value from the original purchase price available during the ICO.