The term "cryptocurrency" was coined after the publication of an article about Bitcoin's "Crypto currency\" system in Forbes magazine in 2011. At the same time, both the creator of Bitcoin and many other authors used the term "electronic cash".

Cryptographic methods are involved in the mechanisms of address generation and verification of authorization for operations with it (digital signature based on a public key system, the disposal is available only to the owner of the secret key corresponding to the given address), as well as the formation of a transaction package and its relationship with other packages (sequential hashing, which makes it impossible to change information about the amount of cryptocurrency). There is no information in the system about address owners or about the fact of address creation (an address can be generated completely autonomously, even without connecting to the network and without reporting anything to the network afterwards) – that is, there is no mechanism to make sure that the recipient's address really exists or that the access key to it has not been lost. The lack of owner information is the basis for (but not limited to) the anonymity of transaction participants. Cryptocurrency payments are more similar to cash payments than to non-cash payment options in terms of their economic terms and consequences, although cryptocurrencies are being developed primarily for remote purchases (e.g., over the Internet).

Payment (transfer of cryptocurrency between addresses) occurs without intermediaries and is irreversible – there is no mechanism to cancel a confirmed transaction, including cases when the payment was sent to an erroneous or non-existent address, or when the transaction was made by third parties who became aware of the private key. Nobody can block (seize) cryptocurrency at a particular address or in general, even temporarily; it is always at the disposal of the owner of the private key to that address. It is true that multi-signature technology allows for the voluntary involvement of a third party (arbitrator) and the realization of "reversible transactions" that can occur against the will of one of the parties. More complex conditions (smart contracts) are implemented using special scripting languages. The inherent problem of double-spending in electronic payments is addressed by the use of technologies such as blockchain, directed acyclic graph, consensus registry (ledger) and others. Transaction information is usually not encrypted and is available in the public domain without registering in the system.

The rules for forming a new amount of cryptocurrency (issuance) are initially set by the protocol. They are usually lottery-like in nature, with different factors influencing the probability of winning – the speed of solving a set task (mining) or the extent of ownership of a set resource (forging). In some cases, part or all of the declared volume of cryptocurrency is initially formed and distributed by organizers by subscription (Initial coin offering – ICO). Usually only one technology is used, but some cryptocurrencies use combinations thereof. There is debate about the economic substance and legal status of cryptocurrencies. In different countries, cryptocurrencies are considered as a means of payment, a specific commodity, an electronic asset, and may have restrictions in circulation (for example, a ban on transactions with them for banking institutions).

Review

With the development of electronic systems, there have been repeated ideas to create an electronic analog of cash for remote payment. But the sticking point was the potential for double spending of the same funds. In the case of cash payments, double spending never occurs since the payment is accompanied by the transfer of money and the buyer cannot pay the money to another seller again, as the buyer no longer has the money. However, electronic systems are organically inherent with the ability to copy state, which allows you to make full copies of the system and then make multiple payments from the same starting state, meaning you can spend the same funds in different directions. The problem was only solved by using trusted intermediaries who keep records of payments and guarantee payments only to the extent that funds are available. This is how all non-cash payment systems work – traditionally banks or other payment system operators act as intermediaries.

Cryptocurrency technology was originally designed to address the lack of a trusted node – one whose actions are guaranteed to be true and who can confirm the correctness of other people's transactions (see the Byzantine Generals problem). This problem was first solved in the Bitcoin system by making it artificially difficult to make changes to the transaction history register. To store information, transactions are combined into blocks that form a continuous chain (blockchain). Continuity is ensured not so much by numbering as by including in the current block the hash sum of the previous block, which does not allow to change the information in a block without changing the hashes in all subsequent blocks. All hashes meet certain requirements; it is time consuming or very expensive to generate hashes that meet these requirements. Only the longest chain is considered true. In different cryptocurrencies, the right to form another block is given to those who have done some work (Proof-of-work), have a certain amount of money in their account (Proof-of-stake), have provided some resources (Proof-of-space), or some other procedure is taken as a basis, which is easy to verify but difficult to execute or forge.

The absence of any internal or external administrator for cryptocurrencies means that banks, tax, judicial and other public or private authorities cannot influence the transactions of any participants in the payment system. Cryptocurrency transfers are irreversible – no one can cancel, block, challenge or force (without a private key) a transaction. However, parties to a transaction may voluntarily temporarily mutually lock up their cryptocurrencies as collateral or invite an additional arbitrator and establish that the consent of all (or at least a set number of) parties is required to finalize the transaction.

As a rule, cryptocurrency developers initially stipulate an upper limit on the total volume of issuance. However, some cryptocurrencies, such as PPCoin[en], Novacoin, Sifcoin and others, do not have a fixed upper limit on the total amount of issuance and both issuance and de-issuance (by mandating the destruction of a fixed amount in each transaction) are possible.

Most cryptocurrencies provide pseudonymity – all transactions between all addresses are publicly available, but there is no data about the owners of the addresses. However, the identity of the owner may be established if additional information related to the address becomes known (e.g., for transactions through exchange services). For additional anonymization, it is recommended to use different addresses for different clients. There are also separate services ("mixers"), through which the payments of many clients pass through, masking the real payers. ZeroCash offers the option to replace pseudonymity with anonymity

Background

Cryptography for confidential payments began to be used in 1990 in the DigiCash system of David Chaum, whose company went bankrupt in 1998. That payment system was centralized.

The term "cryptocurrency" first began to be used after the emergence of the Bitcoin payment system, which was developed in 2009 by a person or group of people under the pseudonym Satoshi Nakamoto (identity still unknown). The term "cryptocurrency" became widespread after Andy Greenberg's article titled "Crypto Currency" was published in Forbes on April 20, 2011.

Later forks appeared: Namecoin (decentralized DNS for registration within the .bit domain zone), Litecoin (uses scrypt hashing), PPCoin (uses a hybrid proof-of-work/proof-of-stake mechanism, has no upper limit on issuing volume), Novacoin (similar to PPCoin, but uses scrypt) and many others.

Until July 2013, the software of all cryptocurrencies except Ripple was based on the open source Bitcoin system. Since July 2013, other platforms began to appear, into which various infrastructure was integrated – exchange services, stores, messengers and so on. Such cryptoplatforms include: Bitshares, Mastercoin, Nxt and others.

Altcoins

Altcoins (alternative coins) are all cryptocurrencies that emerged after Bitcoin.

The first altcoins emerged in 2011: Litecoin and Namecoin. Their developers sought to overcome a number of issues inherent in bitcoin (for example, Litecoin has a higher transaction speed) or to use blockchain technology in other areas (Namecoin was developed to build alternative root DNS servers).

Many altcoins are very similar in nature to bitcoin, have similar characteristics and can use the same hardware as bitcoin, but some cryptocurrencies have significant differences. Ethereum has become a crypto platform through the use of "smart contracts". The independence from bitcoin is even stronger in Ripple, which is actually a centralized system. A number of cryptocurrencies, such as Dash, have emphasized increased anonymity.

Sometimes a new cryptocurrency appears as an offshoot (fork) of another cryptocurrency by changing parameters that make the data of the old and new systems incompatible. This usually happens when some participants switch to a new protocol and some stick to the old one. That said, both cryptocurrencies may share a common transaction history – which has accumulated up until the time of their separation.

Purchase and exchange

There are various ways to purchase cryptocurrencies. New (issued) quantities are usually distributed according to initially established procedures specific to each of the cryptocurrencies (mining, forging, ICO). Mining and forging aim to build the blockchain: creators of new blocks are rewarded with some amount of issued cryptocurrency and there is usually no other way to put it into circulation. An ICO is a way to raise funding through the sale of batches of new cryptocurrency that were originally generated and received by the ICO organizer.

After the initial distribution of the new issue, others who wish may receive the cryptocurrency from those who already own it – in exchange for regular money either for goods or services provided, either as donations or a loan. Exchanges can be conducted directly between interested parties without intermediaries or through one of the many digital currency exchange platforms.

ICO (cryptocurrencies)

An ICO is an unregulated means by which funds are raised for a new venture in the form of cryptocurrency. ICOs are used by startups to bypass the strict and regulated capital raising processes required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often Bitcoin or Ethereum.

In mid-2017, the U.S. Securities and Exchange Commission (SEC) issued a clarification on ICOs and their risks and comparison with traditional investment methods. The Commission emphasized that the technology could be used to provide fair and legitimate investment opportunities and suggested that offerings be regulated under the U.S. Securities Exchange Act of 1934, specifically registering the offer and sale of tokens with the SEC.

On September 4, 2017, seven Chinese financial regulators officially banned all ICOs in the PRC, requiring that the proceeds from all ICOs that have already passed must be refunded to investors, or else the violator will be "severely punished according to the law"; this action by Chinese regulators resulted in large sell-offs and downgrades of most cryptocurrencies, prior to this ban, ICOs had raised the equivalent of nearly 400 mln USD from approximately 100,000 investors. However, a week later, a Chinese financial official said on Chinese national television that the ban on ICOs is only temporary, until there are rules and standards governing ICOs.

In September 2017, the Australian Securities and Investments Commission (ASIC) published guidance on legal obligations for companies that organize ICOs.