Cryptography is a technology that is used in both payment and communication systems. The public-key cryptography secures communication and payment from third parties. It is a computer protocol i.e. a set of rules that govern how information is transferred between computers. Independent computers across the internet can link together through a decentralised network.
In payment systems, cryptography enables the transfer of currency in a safe and more secured way. Think of conventional currencies used as medium of exchange such as the GBP (£), Dollars ($), Yen (¥) and Naira (N). Each currency is controlled and regulated by a central financial authority in their respective countries. Like the conventional currency, cryptocurrency is a medium of exchange. However, unlike the conventional currency, it does not have a physical form. It also does not have an intrinsic value that is, cryptocurrency is not redeemable for another commodity such as gold.
Nevertheless, cryptocurrency has perceived inherent value based on the technology and the integrity of the cryptographic code. The code is resistant to counterfeiting. It also prevents spending money you don’t own through forgery. Cryptocurrency consists of a decentralised network meaning that the flow is determined by the sum of quantity of transactions. The transactions are posted to a distributed ledger (a database that records all the transactions of all computers connected to a network). Think of the traditional ledger as a spreadsheet recording which is maintained by a financial institution e.g. a bank. The distributed ledger is maintained by every computer connected to the network and each computer has its own copy of every transaction happening in the network. The system is open; therefore, anyone with a computer and internet connection can transact with anyone, anywhere in the world through this ledger without having to go through a bank.
Is cryptocurrency a technological breakthrough or an investment fad? Learn more in subsequent posts.