A serious title

The more serious title for this article is "What is a cryptocurrency and how does it work?". Welcome to the internet, where everything is full of memes.

A non-technical introduction

There is a significant amount of hype surrounding things like Bitcoin, Litecoin, Ethereum, and many others. In general terms, "cryptocurrencies" are increasingly getting the attention of the general public. I would like to try and explain what a so-called "cryptocurrency" is. I will try to stick to not-so-technical terms to give a general overview.

First, the term "cryptocurrency" consists of two obvious parts: "crypto" and "currency". Everybody usually has an idea of what a currency is: in the most simple terms, it's something you can pay with. You can drop EUR 5 or more on an overpriced flavoured coffee, or USD 1 on a McDonald's cheeseburger. The amounts are of course fictitious. In more formal terms, a currency is: "something that is used as a medium of exchange; money." [source] or "the money that is used in a particular country at a particular time" [source]. I'll spare you the hardcore economic definitions.

At the same time, not so many people have an idea what "crypto" means. In its pure form, it is "a combining form meaning 'hidden', 'secret'" [source]. It is usually found in combined expressions like "cryptography". The "graphy" in "cryptography" goes back to Greek where "graphein" means "writing". So cryptography has something to do with hidden or secret messages. Encryption is one aspect of cryptography that deals with the process of making sure that a given message can only be read by legimitate parties, but not by adversaries. Digital signatures are another aspect of cryptography: a message can be given a digital signature that enables receivers of the message to check if the message is authentic (i.e. it was created by the party claiming authorship) and if the message is unchanged since it was created. More generally, cryptographic methods can provide certain aspects of digital security.

Now we can take another look at the term "cryptocurrency". Cryptography and currency seem to go together somehow. Is there someone who puts a digital signature on my EUR / USD / GBP / younameit bills to prove that they are valid and untampered with? No, this is done by other means. A "cryptocurrency" is a digital currency (you can exchange it and maybe pay for something with it) and it is technically secured by cryptographical methods (you can digitally prove authenticity, ownership, and many other things).

If you are still having a hard time understanding why a cryptocurrency needs cryptography, don't worry, it becomes clear once the you read the next, slightly more technical, section.

A technical introduction

A digital currency does (usually) not have physical tokens. What you own is still called coins, but they are purely virtual. You own a certain number, but you cannot touch it. Nonetheless, the general lingo is still pretty much the same as for the money you've been used to: there are coins, there are wallets, and there is a sort of "bank account". If you own a certain amount of a specific cryptocurrency, it has to reside somewhere. Regular oldschool money usually resides either in your bank account or in your wallet. You can move it around by making a bank transfer or by giving someone a couple of bills to pay for something. Cryptocurrencies can only be transferred digitally because there is no physical incarnation.

How do transactions work?

Let's assume that the only way to get a certain amount of your preferred cryptocurrency is to buy it, i.e. exchange it for something else. There are indeed other ways to gain cryptocurrency like mining, giveaways and the like, but we'll exclude those for now. As soon as you acquire the desired amount, the party you are acquiring it from needs to transfer the amount to you. They cannot transfer it to you in person, so they will need some form of address (that belongs to you) where they can send the given amount of the given cryptocurrency. Next, they make a transaction for the given amount to the given address (your address). This is where the next important term comes into play: the "blockchain".

What is a blockchain?

A blockchain, or block chain, is a chain of blocks. (Indeed!)

Transactions get wrapped in so-called blocks and the blocks are linked to each other, forming a chain. This chain is secured against manipulation by cryptographic methods. Each block carries a hash value that proves its integrity. Some data from the preceding block is part of the input for the current block's hash calculation, which serves to ensure the integrity and the relation between the two blocks. In this way, each block is linked to its predecessor. The entire chain of blocks can be checked for overall integrity. Manipulation somewhere in the middle would immediately cause the chain verification to fail at the exact block that was manipulated. The very first block in the chain is called the "genesis block".

Who creates blocks and how?

New blocks are created by a process called "mining". A blockchain system is based on so-called nodes, effectively computers running a certain piece of software. Nodes maintain peer-to-peer connections. When someone makes a transaction, it gets fed into this peer-to-peer network. Nodes can select transactions and put them into a block. Then, they send the block back to the network. If the block gets accepted, it will receive an increasing number of confirmations from other nodes. Due to the concurrent nature of this process, blocks are appended to the chain all the time, and a decision is required as to which of the potentially multiple new chain heads should survive. Usually, the longest chain is picked and the other chains may rest in peace. Now one could very well argue that it would be easy to spam the network with blocks in order to influence which chain will survive. This is where the different mining techniques become relevant.

PoW! PoS!>

In order to avoid (and make unattractive) block spam on the network, a technique called "proof of work" or "PoW" was devised. A party wishing to create a new block has to solve a given puzzle, for example compute a hash that has certain properties, and only a valid solution to the puzzle will enable the miner to submit the block and actually get it accepted onto the chain. Another approach is called "proof of stake" (often enough called "proof of steak", omnomnom), in short "PoS". Here, nodes are randomly selected for block creation. Their chances increase with the amount of unspent coins being held. Even more alternative mining techniques are being researched.

Why would anyone mine?

For PoW, you need computing power - for PoS, you need to acquire a lot of coins and leave them unspent. What is the incentive to do mining at all? Simple: miners are rewarded for each accepted block they create. So if you throw a lot of hashing power and electricity at a given PoW coin, or hold a huge unspent amount of your favourite PoS coin, you will effectively earn money. Also, this is the way new coins are created until the maximum supply is reached. PoW mining is a full-featured economic branch nowadays. If you're interested, take the time to watch Youtube videos about Bitcoin mining farms or search for articles regarding graphics cards shipments. It's a highly fascinating field.

Interacting with the blockchain

As you have probably realized, you need to interact with the blockchain network of your preferred cryptocurrency in order to make transactions. This is usually done through software called a "wallet". Such a software wallet allows you to create new addresses, payment requests, and to send a portion or all of your held coins to somebody else. There are alternatives like hardware wallets, paper wallets, and many other fascinating solutions. Run these terms through your favourite search engine to discover all the nice things out there :)

When a software wallet is executed, it connects to the peer to peer network and synchronizes a copy of the block chain to the local computer. The entire chain can be validated at any time. Big chains like the Bitcoin blockchain take a lot of space on the hard disk, which is a problem for which solutions are actively being researched.

An alternative to local software wallets exists in the form of online wallets, either provided as a general wallet service, or provided by exchanges in order to enable you to do anything meaningful at all on the exchange. True peer to peer exchanges are being developed and at least one of them should go live in early 2018.

Ending the wall of text

I intended to give a basic explanation of what a cryptocurrency is and ended up writing a whole wall of text. This proves that the cryptocurrency universe as such is complex and one thing leads to the next. I avoided going into details about cryptography on purpose. I mentioned only hashes, which are not necessarily cryptographic hashes. I did not mention public and private keys, aspects of wallet security, and many other areas. I have merely scratched the surface, hoping to give a basic understanding, and I hope that I didn't make your brain implode.

I may go into more detail on some of the topics in future articles. I'm open for feedback and questions. Thank you for reading this article!