The concept of cryptocurrency was first mentioned in by Wei Dai, who talked about using cryptography to create and transact a new form of money rather than rely on a central authority to do it. Alternate names: Digital currency Bitcoin is the best-known cryptocurrency and the first industrial-strength version of the blockchain implementation.
It was first introduced in through a white paper authored by Satoshi Nakamoto. The concept of a digital, decentralized, and secured payment system that does not depend on banks and other financial institutions has caught on. Ethereum, XRP, and Litecoin are among some of the best-known cryptocurrencies.
How Cryptocurrency Works A simple cryptocurrency transaction involves sending it from one person to the next. Note All cryptocurrency transactions have a unique cryptographic signature, which creates a fixed record on the blockchain. Each wallet has a public and private key attached to it. The public key is used to create an address for your wallet so you can receive cryptocurrencies.
A private key, combined with the wallet, gives you the cryptographic signature that helps verify cryptocurrency transactions. Once it's done, this move would be broadcast on the Ethereum network to be verified or mined. Note Cryptocurrencies are not backed by governments and are not legal tender. Computers on networks around the world receive these requests, which they bundle together in what is called a "block.
Once the block is validated or mined, it gets added to the blockchain. This decentralized approach would prevent any single entity from blocking transactions, while offering a level of privacy to all users. As a quick example, let's say Alice and Bob are b-money users.
They both have a public key: Alice has public key "A" and Bob has public key "B", for which they both control their unique private keys. And, as recorded in the ledgers maintained by all users, both their public keys hold b-money units; let's say three units each.
If Bob wants to receive two b-money units from Alice because he's selling her a product , he sends her his public key: B. Assuming Alice wants to buy the product, she then creates a transaction in the form of a message: "2 b-money from A to B". Next, she signs this message, with her private key corresponding to A. The message and the cryptographic signature is then sent to all b-money users. The signed message proves to all b-money users that the rightful owner of A wants to send two b-money units to B.
Everyone, therefore, updates their ledgers, now attributing a total of one b-money unit to A and a total of five b-money units to B — without learning that Alice or Bob control either. If this solution sounds familiar, it should: It's roughly how, 10 years later, Satoshi Nakamoto designed Bitcoin. B-money, Version 2 Dai considered his first b-money solution impractical, however, "because it makes heavy use of a synchronous and unjammable anonymous broadcast channel", he explained in his proposal.
Put differently, the first b-money proposal didn't solve the double-spending problem. Alice could send two b-money units to both Bob's B and to Carol's C at the same time, transmitting these transactions to different parts of the network. Both Bob and Carol would give Alice a product in return … only to later find out that half of the network won't acknowledge their new balances.
That's why Dai came up with a second b-money solution, all in the same proposal. In this version, not everyone maintains a version of the ledger. Instead, the system would consist of two types of users: regular users and "servers". Only the servers, linked through a Usenet -style broadcast network, would maintain the b-money ledgers. To verify that a transaction went through like it should, regular users — like Bob and Carol — would have to verify it with a random subset of these servers.
In case of a conflict, Bob and Carol would presumably reject the transaction from Alice and not sell her anything. While not detailed in the proposal, anyone would probably have been able to become a server, but "each server is required to deposit a certain amount of money in a special account to be used as potential fines or rewards for proof of misconduct", Dai proposed. The servers should also periodically publish and cryptographically commit to ownership databases. If this sounds somewhat familiar as well, that's no wonder either: Dai's second b-money proposal loosely resembles what would today be called a proof-of-stake system.
To boot, Dai added an early version of a smart contract solution to his proposal s. These types of smart contracts most closely resemble a mixture of a proof-of-stake system and an arbitration system, where both parties to a contract and an arbitrator must all deposit funds in a special account. Curiously for modern standards, however, these contracts did not have a dispute resolution system encoded: Instead it was possible that, in case of disputes, different users or servers would adjust their own ledgers differently, in effect leaving the state of ledgers on the network out of consensus.
Presumably, the potential penalties would make the cost of cheating too high to risk it. Monetary Policy Yet, where b-money would have perhaps differed most sharply from Bitcoin was Dai's proposed monetary policy. Bitcoin's monetary policy is of course very straightforward.
To bring coins in circulation, it initially issued 50 new bitcoins per block, a number that has since dropped to This number will continue to decrease over time until, some hundred years from now, the total amount of bitcoin issued caps out at slightly below 21 million. Whether or not such a monetary policy is ideal has been a subject of debate, but one thing is clear: So far it has not produced a stable coin value. In contrast, a stable coin value was explicitly part of Dai's vision.
To achieve this, the value of b-money was to be coupled to the value of a theoretical basket of goods. For example, b-money units would be worth one basket of goods. This should give b-money a stable value, at least in relation to this basket of goods: the same b-money units would buy the same basket of goods in the past, in the present, and in the future. To issue new coins, users were to determine what a basket of goods would cost relative to a solution to a computational problem: a "proof of work".
Using this indicator, the first person to produce a valid proof of work would be credited new b-money by all users or the servers. Therefore, no one would be particularly incentivized to produce proofs of work unless they intended to use b-money, limiting inflation to the growth of the "b-money economy".
Alternatively, in an appendix to his proposal, Dai suggested that money creation could be realized through an auction. Either all users first protocol or the servers second protocol would first have to determine an optimal increase of the monetary base.
Then, if this ideal increase were to be established at b-money units, for example, an auction would determine who should create these units: whoever was willing and able to provide the most proof of work for it. Bitcoin B-money was never implemented. It couldn't have been: "b-money wasn't a complete practical design yet", Dai acknowledged in a LessWrong forum thread a couple of years ago.
What's more, Dai did not expect b-money to take off in a big way, even if it was implemented.
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