Digital currency, which is protected by cryptography and is usually used as a medium of exchange in a digital peer-to-peer (P2P) economic system is called cryptocurrency. The use of cryptographic methods is what provides complete protection for these systems against fraud and counterfeiting.
The first cryptocurrency that was ever created was Bitcoin, presented by the pseudonym developer Satoshi Nakamoto in 2009. Nakamoto’s goal was to create a new electronic payment system that would allow digital financial transactions between users without the need for intermediaries like banks or government agencies.
Most cryptocurrency systems work through a decentralized structure, which in aggregation is supported by a distributed computer network. Every computer (or device) that connects to a network is called a host. In a nutshell, a node is any physical device connected to a network and is able to send, receive and forward information.
Each node is classified according to the functions it performs in the system. For example, the Bitcoin network consists of at least seven different types of nodes and the nodes that perform all the available functions are called complete nodes.
Cryptocurrency systems are considered decentralized because they do not depend on a centralized supply point. Network nodes are widely distributed throughout the world and the production and management of cryptocurrency units are based on pre-programmed algorithms and mathematical tests.
However, each cryptocurrency works in a certain way, which leads to different degrees of decentralization. In other words, some cryptocurrencies can be considered more decentralized than others, depending on the network structure and how the nodes are distributed.
Most cryptocurrency systems use a publicly distributed registry known as a blockchain, which is an ever-growing list of records that are very resistant to change. As the name suggests, the blockchain consists of a linear chain of blocks and, in the context of cryptocurrencies, is responsible for the constant registration of all confirmed transactions (and associated data) – all protected by encryption.
In general, each cryptocurrency works on the top of the blockchain, which operates according to a predefined set of rules (ie the underlying protocol). This protocol defines how blockchain and cryptocurrency should work.