What Is a Cryptocurrency?

The concept of a digital currency secured by cryptography has existed since at least as early as 1983 when American cryptographer David Chaum introduced ecash. However, the first cryptocurrency to truly achieve mainstream recognition was Bitcoin (BTC), which launched in January 2009.

Bitcoin’s main innovation was the use of blockchain — a distributed, cryptographically secured ledger of all BTC transactions that have ever taken place. The use of the blockchain allows the Bitcoin network — which consists of numerous independent nodes all of which choose to participate on a voluntary basis — to effectively function without requiring a central authority, like a bank, to enforce the rules.

Bitcoin’s blockchain is maintained and updated through the use of the proof-of-work — a computationally intensive consensus algorithm based on cryptographic hash functions, which ensures that no new Bitcoin can be created without spending considerable effort and that all BTC transactions are faithfully and permanently recorded.

Bitcoin’s appearance inspired further growth of the cryptocurrency industry, which by 2020 consists of tens of thousands of cryptocurrencies of various types, collectively worth hundreds of billions of dollars.

Some of those are, similarly to Bitcoin, fully decentralized proof-of-work coins, such as Bitcoin Cash (BCH), Litecoin (LTC) or Monero (XMR). Others use different consensus algorithms, such as Tron (TRX), Tezos (XTZ) or Dash (DASH), which all use proof-of-stake. Others still are based on private blockchains that are operated by companies for internal use and are inaccessible to the general public. But all of them have at least one thing in common: the operation of their networks is secured by cryptographic algorithms.