Evolution of Cryptocurrency

A cryptocurrency is a digital currency designed to work as a medium of exchange through a computer network that doesn't rely on central banks or trusted third parties to verify transactions. Instead, it uses cryptography to confirm transactions on a publicly distributed ledger called a Blockchain.

Now, let's discuss how Cryptocurrencies evolved. In the initial phase, the pointers we needed to follow to generate a cryptocurrency were having an identity by publishing our public key and keeping our private key. That's it!!!

By using these instructions, the first cryptocurrency we had was GoofyCoin.

GoofyCoin

Goofycoin has a few rules which allow a valid and functioning cryptocurrency.

Rules:

• Only one entity is allowed to generate new coins, i.e, Goofy
• Whoever owns a coin can transfer it to somebody else

Both these rules can be implemented using cryptographic operations. But this coin doesn't have control over double spending attacks.

Example:

• Goofy makes a transaction to pay Alice
• Alice makes a transaction to pay Bob. Then Alice makes another transaction with Charlie, sending the same coin

This is called a double-spending attack because Alice is spending the same coin twice.

In order to fix this problem, ScroogeCoin comes into the picture. ScoorgeCoin was generated from GoofyCoin only.

ScroogeCoin

• Transactions occur in Scrooge are same as GoofyCoin
• Scrooge also creates an append-only ledger(blockchain) which stores the transactions and through which people can verify that coin transfer is official
• Scrooge determines that the transaction is valid(no double-spend) and signs the block also with its secret key
• Transactions that are not recorded(on Scrooge's blockchain) and signed with Scrooge's digital signature are not official

As we can see, Scrooge can solve the double-spending attack.

BUT!!!

Scrooge is solving this by maintaining a centralized ledger.

Now we have another major problem, i.e., Centralization.

Let's understand Why this is a problem???

• Scrooge can generate coins for himself
• He could punish users by not adding transactions to his blockchain
• He could blacklist users

Now the question that comes to our mind is Does Decentralization solve these issues?

The answer is Yes.

But how we'll deal with the limitations of Decentralization???

Finally!!! Bitcoin came into existence by solving Decentralization problems.

Bitcoin

• Solves Double-spend problem using peer reviews (peer-validation)
• Peer reviews have a Sybil Attack problem which was solved by the Proof of Work(PoW) algorithm.

This is how cryptocurrencies came into existence and evolved into the market.

Thanks for reading!!!

Reference:

https://www.youtube.com/watch?v=RRW0pFgc-gk&list=PLx7xB6WO8n_Gr15ZsLpItbuV_RDrookDM&index=15