Cryptocurrency (or crypto) is a digital asset designed to work as a medium of exchange using cryptography to secure transactions, control the creation of additional units, and verify the transfer of assets.^[1][2]

Overview

Cryptocurrency is a digital payment system that does not rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Payments made using cryptocurrencies do not exist as actual physical coins that can be transported and exchanged; rather, they only exist as digital entries to an online database that detail specific transactions. A public ledger keeps track of all cryptocurrency transactions that involve funds transfers. Cryptocurrency is stored in digital wallets.^[10]

Bitcoin, created in 2009, was the first decentralized cryptocurrency and remains the most widely traded and covered cryptocurrency.

As of September 2017, over a thousand cryptocurrency specifications existed; most are similar to and derived from the first fully implemented decentralized cryptocurrency, Bitcoin. Within cryptocurrency systems, the safety, integrity, and balance of ledgers are maintained by a community of mutually distrustful parties referred to as miners: members of the general public using their computers to help validate and timestamp transactions adding them to the ledger in accordance with a particular timestamping scheme.  Miners have a financial incentive to maintain the security of a cryptocurrency ledger.^[3]

As of December 2023, there are over 119 countries and 4 British Overseas Territories(BOT) worldwide where Bitcoin and cryptocurrencies are legalized and recognized by law. Some of the most popular cryptocurrencies include Bitcoin, Ethereum, Tether, USD Coin, Binance Coin, and Ripple. ^{[3][5][9][44]}

As of March 2024, there are 13,217 cryptocurrencies in existence. However, not all cryptocurrencies are active or valuable. Discounting many “dead” cryptos leaves only around 8,985 active cryptocurrencies. There are around 420 million cryptocurrency users across the globe. And approximately 18,000 businesses now accept a form of crypto as payment. Cryptos have today can be most simply broken down into three categories:^[45]

• Bitcoin - the market leader and original cryptocurrency

• Altcoin - Alternatives to Bitcoin (not necessarily similar)

• Tokens - Cryptocurrencies using pre-existing blockchains

Most cryptocurrencies are designed to gradually decrease the production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation. Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies can be more difficult to seize by law enforcement.^[3]

Architecture

Ledger and Digital Signature

A ledger is a computer file that records economic transactions including monetary balances. These ledger transactions are decentralized and are protected by digital signatures. Each cryptocurrency transaction has its own ID, which is followed by a public and private key ("digital signatures") that are unique to that transaction. To verify a transaction, all three criteria must match — Transaction ID, Private key, and Public key. The private key is a 256-bit binary code (over 1x1077 combinations), and it is impossible to guess the correct combination.

The ledger transaction also has a cryptographic hash function and hence encrypting and protecting the decentralized transaction ledger. The SHA 256 cryptographic hash function is used in cryptocurrency and is a one-way cryptographic hash function, which means it cannot be decoded backward.^[20]

Blockchain

Blockchain technology is used to secure cryptocurrency transactions. Each time a transaction is completed, the record of that transaction is added to the blockchain's growing "chain of blocks." Following a transaction between two parties, the distributed ledger is verified across a peer-to-peer network using computational work known as "Proof of work." Each transaction has a cryptographic hash function that is linked to the next transaction block, forming a blockchain. The enhanced encryption enables the cryptocurrency network to be decentralized and operate effectively without the intervention of a regulatory body. Blockchain technology makes the network more secure and avoids bank regulatory costs.^[20]

Nodes

Nodes are the computers that manage the blockchain network. They verify transactions, store a copy of the blockchain, and communicate with other nodes to synchronize the network. Nodes can be full nodes storing a full copy of the blockchain or lightweight nodes storing only a portion of the blockchain.^[46]

Wallets

Wallets are used to store and manage cryptocurrencies. The wallet contains a private key to sign transactions and a public key to receive funds. There are two types of wallets - hot wallets & cold wallets.

• Hot wallets: Connected to the network and are suitable for frequent transactions.
• Cold wallets: Not connected to the internet and are safer for long-term storage.

Wallets are essential to cryptocurrency accessibility and usability. They allow users to send and receive funds easily and securely.^[46]

Mining and Staking

Mining and staking are the processes through which new cryptocurrency units are created.

Mining on a blockchain is the process of validating transactions. Miners collect data on each transaction and place the information in a ‘block.’ They subsequently authenticate each transaction. Successful miners receive new cryptocurrency as a reward for their efforts. The incentive to contribute to the network's processing power reduces transaction fees. Miners use specialized machines such as FPGAs and ASICs in running complex hashing algorithms. Machines such as SHA-256 and scrypt have increased the rate of generating hashes that validate any transaction. Mining is used in Proof-of-Work systems like Bitcoin, where computers solve complex mathematical problems to verify transactions and create new monetary units.

Staking, on the other hand, is used in Proof-of-Stake systems like Ethereum 2.0, where users must hold a certain amount of cryptocurrency in order to participate in the network and earn rewards.^[46]

Mining and staking are important for the creation and distribution of cryptocurrencies. They encourage users to participate in the network and contribute to its security.

Timestamping

Cryptocurrencies use various timestamping schemes to avoid the need for a trusted third party to timestamp transactions added to the blockchain ledger.

History

The Idea — 1998-2008

In 1998, Wei Dai published a description of "b-money", an anonymous, distributed electronic cash system. Shortly thereafter, Nick Szabo created "bit gold". Like Bitcoin and other cryptocurrencies that would follow it, bit gold was an electronic currency system that required users to complete a proof of work function with solutions being cryptographically put together and published. A currency system based on a reusable proof of work was later created by Hal Finney who followed the work of Dai and Szabo.^[11]

In October 2008, a paper by Satoshi Nakamoto (a pseudonym) titled Bitcoin: A Peer-to-Peer Electronic Cash System outlined a system for creating a digital currency that did not require trust in any third party. Nakamoto's paper served as the catalyst for the emergence of cryptocurrencies.^[11]

The Launch — 2009

The first decentralized cryptocurrency, Bitcoin, was created in 2009 by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, as its proof-of-work scheme. The first Bitcoin transaction took place between Nakamoto and Hal Finney on 12th January 2009. It was not until February 2010 that someone realized how valuable this new technology could be when one person paid 10,000 Bitcoins for two pizzas delivered by Papa John’s. That transaction is now worth millions of dollars.^[12]

Further Development— 2010-2024

In April 2011, Namecoin was created as an attempt at forming a decentralized domain name system, which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It was the first successful cryptocurrency to use scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin was the first to use a proof-of-work/proof-of-stake hybrid. IOTA was the first cryptocurrency not based on a blockchain and instead used The Tangle.

In 2012, following the success of Bitcoin, many other cryptocurrencies known as altcoins have been launched. Some of these are clones or forks of Bitcoin, while others are new cryptos that were created from scratch. They include Litecoin (2011), Ripple (2012), Ethereum (2015), Dogecoin (2015), and EOS (2018).

On August 6, 2014, the UK announced its Treasury had been commissioned to do a study of cryptocurrencies, and what role, if any, they can play in the UK economy. The study was also to report on whether regulation should be considered.^[12]

Spot Bitcoin and Ether exchange-traded funds (ETFs) in the latter half of 2023 was likely a major driver of the industry. BlackRock’s proposed spot Bitcoin ETF appearing on the DTCC website and Grayscale’s court win versus the SEC regarding the proposed conversion of the Grayscale Bitcoin Trust (GBTC) into an ETF.^[48]

Ethereum Shapella hard fork was the protocol’s first major upgrade in 2023 since transitioning to a Proof of Stake (PoS) system. It was considered a significant change to the network with the implementation of EIP-4895, which enabled validator withdrawals of staked ETH from the Beacon Chain.^[48]

Layer-2 (L2) rollups witnessed notable development in 2023 with multiple chains and tech stacks launched. Optimistic rollups still led the L2 market, with Arbitrum and Optimism dominating around 80% of market share in TVL. Additionally, the implementation of zkEVMs boosted the growth of ZK rollups. zkEVMs combine the benefits of zero-knowledge proofs and the Ethereum Virtual Machine (EVM).^[48]

Interest in meme coins saw a resurgence in 2023, fueled by various factors, including increased mainstream awareness of cryptocurrencies and high-profile endorsements.^[48]

The Dencun upgrade, also known as the Deneb-Cancun upgrade, went live on March 13, 2024, and is a series of network upgrades for Ethereum. The upgrade aims to improve the network's scalability, security, and efficiency, and includes nine improvements.^[49]

The Boom

In late 2017, cryptocurrencies began to see unprecedented growth. The total market cap for all cryptocurrencies reached $820 billion in January 2018 before plummeting later that month. Despite this crash, the crypto market continued to experience steady growth since then. Many startups took advantage of the cryptocurrency boom to raise money via initial coin offerings (ICO). In 2017 and 2018, more than 800 ICOs raised roughly $20 billion in funding. The ICO space was then plagued by outright frauds and scams, and the value of many of these ICO tokens collapsed within a year.^[14]

In December 2020, Bitcoin broke out to new all-time highs of more than $20,000 and eventually made it as high as $68,990 in November 2021. Ethereum, the number two cryptocurrency, also had an even more impressive climb, from just $120 to a high of almost $5,000 in 2021.^[12][15]

In April 2024, the global crypto market cap reached $2.68 trillion. Bitcoin has gained 63% since the start of the year and recently reached record highs above $73,000.^[16][47]

Legality

In 2021, El Salvador became the first-ever country to accept Bitcoin as a national currency.

In March 2021, it was announced by Swiss Lugano's city director, Pietro Poretti, and its mayor, Michele Foletti that Bitcoin and the stablecoin Tether will soon be adopted as Lugano's "de-facto" legal tender. The "de-facto" element of this announcement is very important, as it means the city will be adopting Bitcoin regardless of whether Switzerland's national government accepts it or not.^[43]

In September 2021, Panamanian Congressman Gabriel Silva released a bill intended to provide "legal, regulatory, and fiscal certainty to the use, holding and issuance of digital value and crypto assets in the Republic of Panama". Silva is known to be enthusiastic about cryptocurrency, and has made multiple tweets regarding the bill and stated that it will hopefully "create jobs, attract investment and bring transparency" within Panama.^[43]

In 2023, the US court made decisions marking victories for the crypto industry, such as the nuanced ruling on Ripple’s XRP and the approval of the first Bitcoin Spot ETFs in January 2024. These developments reflect the complex and evolving nature of the U.S. crypto regulation.^[50]