Introduction to Cryptographic Currencies

This is the first of a multipart post series about ‘cryptographic currencies‘, looking at the concepts behind the new ‘crypto-currencies’ (e.g. bitcoin, litecoin and some novelty / alt-coins), the various terminologies and definitions, characteristics and technology driving this, before looking at the criticisms leveled at crypto-currencies. In the first post we look at an ‘Introduction to Cryptographic Currencies’.

Crypto-currencies¹Wikipedia defines a crypto-currency as a digital medium of exchange, which seeks to incorporate principles of cryptography to implement a distributed, decentralized and secure information economy (http://en.wikipedia.org/wiki/Cryptocurrency) (short for cryptographic currencies, like Bitcoin²Bitcoin is a proof of knowledge peer-to-peer payment network using a digital crypto-currency based on an open source public-key cryptography protocol, where the seller and buyer’s exchange money that is recorded in a public network transaction log, called the blockchain. The operators of this public network, known as ‘miners’, are rewarded with transaction fees and newly minted crypto-currency ‘coins’ (http://en.wikipedia.org/wiki/Bitcoin)) are distributed, decentralized digital ‘money’ that are available near instantaneously anywhere. Unlike traditional fiat³Fiat money (Latin word for ‘it shall be’ originating in 11th century in China) has been defined variously, for example as any money declared by a government to be legal tender (http://en.wikipedia.org/wiki/Fiat_money) currencies or money (such as the dollar, euro or yen), crypto-currencies are issued and managed without central authority involvement whatsoever: there is no government, company, bank or individual in charge of ‘most’ crypto-currencies. As such, crypto-currencies are more resistant to inflation and corrupt institutions. With crypto-currencies, you can be your own bank, trading and exchanging ‘digital money’ with any individual or business worldwide more or less instantly.

So what is a Currency and Money?

Without going into too much detail, Wikipedia provides a succinct definition for the purpose of this post for terms in typical daily use.

• Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given socio-economic context or country.
• So a currency (from ‘currant‘, meaning ‘in circulation’) generally refers to money in any form, in use, as a medium of exchange, especially paper money. Typically it comes in the form of banknotes and sometimes coins – physical tokens backed by a government (also called fiat currencies),
• Where as digital currency is electronic money that acts as an alternative currency. Currently, alternative digital currencies are not produced by government-endorsed central banks nor necessarily backed by national currency

Where did Crypto Currencies Originate from?

A software developer called ‘Satoshi Nakamoto'⁴Satoshi is a male Japanese name whose meaning variously is given as ‘wise, clear-thinking, quick-witted’; Naka meaning ‘inside or relationship’ and moto meaning ‘origin’ (http://en.wikipedia.org/wiki/Satoshi_Nakamoto) proposed bitcoin (the first crypto-currency), which was an electronic payment system based on mathematical proof. The idea was to produce a currency independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees. Nakamoto himself mined the first 50 bitcoins – which came to be called the genesis block – on January 3, 2009⁵See ‘The Rise and Fall of Bitcoin’ by Wired (http://www.wired.com/magazine/2011/11/mf_bitcoin/).

Who is Satoshi Nakamoto?

While we may not know who the individual or entity was, we know what was created. As the inventor⁶Satoshi Nakamoto is the founder of Bitcoin and initial creator of the original Bitcoin client, stating in a P2P foundation profile that he is from Japan (https://en.bitcoin.it/wiki/Satoshi_Nakamoto) of the Bitcoin protocol, a paper was published via the Cryptography Mailing List⁷Bitcoin – A Peer-To-Peer Electronic Cash System (https://bitcoin.org/bitcoin.pdf) in October 2008 before releasing the first version of the Bitcoin software in January 2009, participating with others on the project via mailing lists and finally began to fade from the community toward the end of 2010. Extra care was taken never to reveal anything personal about ‘Satoshi Nakamoto’, and the last anyone heard from ‘him’ was in the spring of 2011, when it was said that he had ‘moved on to other things’.

Is there significance in the name ‘Satoshi Nakamoto’?

‘Satoshi’ (a Japanese name) means clear thinking, quick witted or wise, ‘Naka’ can mean medium, inside, or relationship, and ‘Moto’ can mean origin, or foundation. Those things would all apply to the person who founded a movement by designing a clever algorithm. The problem, of course, is that each word has multiple possible meanings.

Interested to find out more about ‘Satoshi Nakamoto’, then head over to CoinDesk to expand on this abbreviated summary.

In the next post we look at bitcoin (the money) and analyze the Satoshi Nakamoto research white paper.