This is the beginning of a cryptocurrency series that begins here.
In the last post we talked a little bit about what a cryptocurrency is in a general sense, and how transactions happen. Here we'll go more in depth about what each unit of cryptocurrency coin is, and connect that idea with the larger idea of a blockchain, which was discussed in the first lesson.
What is a Single Bitcoin?
We'll use bitcoin as an example because it's more basic than steem.
So then, what's a single bitcoin? Back to using one of my favorite educational tools (because it's so useful), the analogy.
Imagine that I had a mountain of gold that I've disseminated to a group of people. Now, among these people are various potential counterfeiters who may try to, in various ways, make fake gold and use it to exchange for goods. These counterfeiters are very good, and at first glance it might be impossible to determine whether the gold is real or not.
This is a problem for many reasons.
First, it devalues the currency to near worthlessness. Imagine if you could print out the currency of your country on your computer, indistinguishable from the actual currency. Now imagine there were many people that could do this. It's an important lesson in economics: belief, perceived finitude, and effort to create vs. expediency to exchange are at the heart of value.
Well, how would we prevent this? One way would be to attach a special number to the transactions that would create a predictable result (as we discussed in the previous lesson). Another way would be to attach a ledger to each piece of gold, so that wherever the gold went the person giving and the person receiving it had to sign their name (or in the case of cryptocurrencies the special alphanumeric string attached to their wallet).
Now, as you can imagine, that'd be a lot of ledgers! But it is the digital age, after all. We can just make the ledgers electronic in much the same way as a sort of spreadsheet keeping track of each digitally signed transaction. Still, it'd be much harder to pull any funny stuff with this system in place, as each and every coin could be traced via signature back to its origin.
In the Digital Age, What is Valuable?
....Actually, come to think of it, in this system the gold is kind of a hassle. You have to carry it around, if you want to send it to someone the digital currency can travel instantly but the gold would have to be mailed or shipped (not to mention you'd have to protect it along the way). Hunh. Actually, the gold is taking away from the value (remember, part of value is expediency of exchange).
So why don't we ditch the gold and just use the ledgers?
This is a revolutionary concept, and defines all cryptocurrencies. A unit of cryptocurrency is essentially a ledger with a special number attached. These ledgers detail every transaction going back to their origin.
Neat, huh?
In the next and final lesson we'll discuss that origin and touch on the role of miners. Until then.
Other Posts in This Series:
Cryptocurrency for Absolute Beginners: What is a Blockchain?
Cryptocurrency for Absolute Beginners: ....So What Is Cryptocurrency, Anyway? (Part 1)