beginner lesson • 12 min
What Is Cryptocurrency?
Learning objectives
By the end of this lesson, you should be able to:
- Define cryptocurrency in simple terms. - Explain how cryptographic signatures authorize transfers. - Describe how a blockchain records and shares transactions. - Explain the original payment goal associated with Bitcoin. - Recognize that some cryptocurrencies have network functions beyond acting as a medium of exchange.
Evidence & citations12 sources
A cryptocurrency is a digital asset, credit, or unit that can be transferred between blockchain-network users using cryptographic mechanisms. (supported)
Cryptocurrency transfers commonly use digital signatures based on asymmetric-key cryptography to authorize transactions. (supported)
A blockchain is a distributed ledger in which transactions are grouped into blocks, cryptographically linked, validated, and replicated across network participants. (supported)
Bitcoin was proposed as a peer-to-peer electronic-cash system that could send online payments directly between parties without a financial institution and address double spending through a distributed network. (supported)
A cryptocurrency can have functions beyond acting as a medium of exchange; for example, ether is used to pay Ethereum transaction fees and support network validation and security. (supported)
Cryptocurrency in plain language
Imagine a shared digital record book that many computers keep copies of. When someone wants to transfer a digital asset, cryptography helps prove that the transfer was authorized. The network groups transactions into blocks, links those blocks together, checks them, and keeps copies among network participants. That combination of a transferable digital unit, cryptographic authorization, and a shared blockchain record is the basic idea behind cryptocurrency.
Evidence & citations8 sources
A cryptocurrency is a digital asset, credit, or unit that can be transferred between blockchain-network users using cryptographic mechanisms. (supported)
Cryptocurrency transfers commonly use digital signatures based on asymmetric-key cryptography to authorize transactions. (supported)
A blockchain is a distributed ledger in which transactions are grouped into blocks, cryptographically linked, validated, and replicated across network participants. (supported)
What cryptocurrency means
A cryptocurrency is a digital asset, credit, or unit that can be transferred between users of a blockchain network through cryptographic mechanisms. The word “crypto” refers to the use of cryptography in the transfer process. A blockchain provides the shared record in which transactions are grouped, cryptographically linked, validated, and replicated across network participants.
Evidence & citations5 sources
A cryptocurrency is a digital asset, credit, or unit that can be transferred between blockchain-network users using cryptographic mechanisms. (supported)
A blockchain is a distributed ledger in which transactions are grouped into blocks, cryptographically linked, validated, and replicated across network participants. (supported)
How authorization works
Cryptocurrency transfers commonly use digital signatures based on asymmetric-key cryptography. In simplified terms, a user uses a private key to create a signature authorizing a transaction. The associated public key can be used to verify that signature. This lets the network check whether the transaction was authorized without requiring the private key to be revealed as part of the verification process.
Evidence & citations3 sources
Cryptocurrency transfers commonly use digital signatures based on asymmetric-key cryptography to authorize transactions. (supported)
How a blockchain supports transfers
A blockchain works as a distributed ledger:
1. Transactions are created and cryptographically signed. 2. Transactions are grouped into blocks. 3. Blocks are cryptographically linked to earlier blocks. 4. Network participants validate the proposed records. 5. The records are propagated and replicated across network participants.
This shared process helps the network maintain a common transaction history. Bitcoin’s original proposal used a peer-to-peer network to support direct online payments between parties without a financial institution and to address the problem of double spending.
Evidence & citations6 sources
Cryptocurrency transfers commonly use digital signatures based on asymmetric-key cryptography to authorize transactions. (supported)
A blockchain is a distributed ledger in which transactions are grouped into blocks, cryptographically linked, validated, and replicated across network participants. (supported)
Bitcoin was proposed as a peer-to-peer electronic-cash system that could send online payments directly between parties without a financial institution and address double spending through a distributed network. (supported)
Two examples of cryptocurrency roles
Bitcoin was proposed as a peer-to-peer electronic-cash system: the idea was to enable online payments directly between parties without a financial institution while addressing double spending through a distributed network.
Ether provides a different example of a cryptocurrency function. Ether is used to pay Ethereum transaction fees and also supports network validation and security. This shows that a cryptocurrency can have purposes beyond serving as a medium of exchange.
Evidence & citations5 sources
Bitcoin was proposed as a peer-to-peer electronic-cash system that could send online payments directly between parties without a financial institution and address double spending through a distributed network. (supported)
A cryptocurrency can have functions beyond acting as a medium of exchange; for example, ether is used to pay Ethereum transaction fees and support network validation and security. (supported)
Key terms
- Cryptocurrency
- ** A digital asset, credit, or unit transferable between blockchain-network users through cryptographic mechanisms.
- Blockchain
- ** A distributed ledger where transactions are grouped into blocks, cryptographically linked, validated, and replicated across participants.
- Digital signature
- ** A cryptographic proof used to authorize a transaction.
- Asymmetric-key cryptography
- ** A cryptographic system using related private and public keys; the private key can create a signature and the public key can help verify it.
- Double spending
- ** The problem of attempting to use the same digital unit more than once. Bitcoin’s proposed distributed network was designed to address this problem.
Evidence & citations9 sources
A cryptocurrency is a digital asset, credit, or unit that can be transferred between blockchain-network users using cryptographic mechanisms. (supported)
Cryptocurrency transfers commonly use digital signatures based on asymmetric-key cryptography to authorize transactions. (supported)
A blockchain is a distributed ledger in which transactions are grouped into blocks, cryptographically linked, validated, and replicated across network participants. (supported)
Bitcoin was proposed as a peer-to-peer electronic-cash system that could send online payments directly between parties without a financial institution and address double spending through a distributed network. (supported)
Common misconceptions
- **“Cryptocurrency is only digital cash.”** Not necessarily. Some cryptocurrencies also support network operations. Ether, for example, is used for Ethereum transaction fees and supports network validation and security. - **“A blockchain is just one company’s database.”** A blockchain is described as a distributed ledger whose records are validated and replicated across network participants. - **“A transaction is authorized just because someone requests it.”** Cryptocurrency transfers commonly use digital signatures so the network can verify authorization using cryptographic methods. - **“Bitcoin was designed only as an investment.”** The original Bitcoin proposal described a peer-to-peer electronic-cash system for direct online payments and addressing double spending.
Evidence & citations9 sources
A cryptocurrency can have functions beyond acting as a medium of exchange; for example, ether is used to pay Ethereum transaction fees and support network validation and security. (supported)
A blockchain is a distributed ledger in which transactions are grouped into blocks, cryptographically linked, validated, and replicated across network participants. (supported)
Cryptocurrency transfers commonly use digital signatures based on asymmetric-key cryptography to authorize transactions. (supported)
Bitcoin was proposed as a peer-to-peer electronic-cash system that could send online payments directly between parties without a financial institution and address double spending through a distributed network. (supported)
Summary
Cryptocurrency is a transferable digital asset, credit, or unit that uses cryptographic mechanisms on a blockchain network. Digital signatures help authorize transfers, while the blockchain acts as a distributed record of validated and linked transaction blocks. Bitcoin was proposed for direct peer-to-peer electronic payments and to address double spending. Other cryptocurrencies, such as ether, can also help pay transaction fees and support network validation and security.
Evidence & citations12 sources
A cryptocurrency is a digital asset, credit, or unit that can be transferred between blockchain-network users using cryptographic mechanisms. (supported)
Cryptocurrency transfers commonly use digital signatures based on asymmetric-key cryptography to authorize transactions. (supported)
A blockchain is a distributed ledger in which transactions are grouped into blocks, cryptographically linked, validated, and replicated across network participants. (supported)
Bitcoin was proposed as a peer-to-peer electronic-cash system that could send online payments directly between parties without a financial institution and address double spending through a distributed network. (supported)
A cryptocurrency can have functions beyond acting as a medium of exchange; for example, ether is used to pay Ethereum transaction fees and support network validation and security. (supported)
Knowledge check
Test what you just learned.
Complete this short assessment for What Is Cryptocurrency?. You will get explanations immediately after grading.
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