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| cryp:cryptocurrencies [2026/03/10 22:41] – Dave Darby | cryp:cryptocurrencies [2026/08/11 14:31] (current) – substantial rewrite and update. Matthew Slater |
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| # Cryptocurrencies | This topic is part of [[gt:digital|Digital & media]] and [[gt:economy|Economy & finance]]. |
| | ====== Cryptocurrencies ====== |
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| ## What are cryptocurrencies? | ===== What are cryptocurrencies? ===== |
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| Cryptocurrencies are decentralized digital currencies that use advanced encryption to facilitate trustless online payments without the need for traditional financial institutions. Unlike state-authorised, bank-issued [fiat currencies](https://www.investopedia.com/terms/f/fiatmoney.asp) (e.g. the dollar or the euro), cryptocurrencies do not have a central issuing authority. Instead, cryptocurrencies are ‘decentralized’, meaning they are maintained by a network of independent nodes spread around the world. Ultimately, cryptocurrencies allow users to engage in direct, peer-to-peer transactions with the same (or greater) security one would expect from traditional online payment methods without having to go through large financial institutions or governments. | Cryptocurrencies are digital 'coins' which can be owned by anybody, in principal anonymously, and which can be transferred without the aid of a trusted 3rd party like a bank, or Paypal or Western Union. |
| | Instead of that institution holding a definitive ledger of how much is in each account, a blockchain is a ledger stored on many, many computers which allows anyone to pay out of their account and prevents anyone from altering its history. |
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| The first and most popular cryptocurrency is of course Bitcoin, which was invented in 2009 by a mysterious person (or persons) using the pseudonym Satoshi Nakamoto. Satoshi’s true identity remains a mystery to this day, but the mark he/she/they left on the world is undeniable. | Ultimately, cryptocurrencies allow users to engage in direct, peer-to-peer transactions with the same (or greater) security one would expect from traditional online payment methods without having to go through large financial institutions or governments. While the privacy they offer is welcome, it creates a tension with governments which want to surveil all financial transactions. |
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| {{ https://lowimpactorg.onyx-sites.io/wp-content/uploads/crypto2.png }} | The first and most popular cryptocurrency is of course Bitcoin, whose protocol and first block was published in 2009 by a pseudonymous person (or persons), Satoshi Nakamoto. |
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| | {{ https://lowimpactorg.onyx-sites.io/wp-content/uploads/crypto2.png }} |
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| | Bitcoin was described in its [official white paper](https://bitcoinwhitepaper.co/) as a “peer-to-peer electronic cash system”. The ideology behind it was metallist, and even though there is no precious metal in a Bitcoin, the issuance is controlled by a predictable algorithm in a process called in the paper, mining. With no fixed dollar value, a limited supply, and global interest, the sky was the limit for the price of bitcoin and many people have become very rich, especially those who bought it as an investment in the early days. On the other hand, with no intrinsic value, the price has been driven almost entirely by hype, and has fluctuated wildly on the way up, sometimes losing 80% of its value. When Cryptocurrencies were a brand new asset class there was no regulation, so the field was thick with scams. |
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| Bitcoin was described in its [official white paper](https://bitcoinwhitepaper.co/) as a “peer-to-peer electronic cash system”. Since then, thousands of cryptocurrencies have been created for an extremely broad range of purposes. Unfortunately, many of these projects are scams or failures; either they are unable to deliver a finished product or they never intended on producing one in the first place. | After a while tech entrepreneurs (and scammers) realised they could finance blockchain innovation (and scams) by selling a new coin, like ordinary companies sell shares except without the regulatory oversight, or indeed the profit sharing or voting rights that go with shares. There was a race to rebuild the financial system using cryptocurrencies, but it struggled because of the prevalence of fraud, the opposition of the incumbent financial system, and the difficulty that non-tech users had managing private keys, understanding new jargon and assessing new types of risk. |
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| ### How do cryptocurrencies work? | ==== How do cryptocurrencies work? ==== |
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| The fundamental technology behind cryptocurrencies is a network structure called a ‘[blockchain](/bloc/blockchain)’. Often described as a ‘distributed ledger’, the idea behind a blockchain is fairly straightforward: a publicly verifiable, tamper-proof record of all transactions on a network. Unlike traditional networks which are often hosted on centralized servers, blockchains are maintained by a decentralized network of ‘nodes’. Each [node](https://en.wikipedia.org/wiki/Node_\(networking\)) records its own copy of the network, and these nodes are in communication with one another to ensure that there is consensus between them. | The fundamental technology behind cryptocurrencies is a network structure called a ‘[blockchain](/bloc/blockchain)’. Often described as a ‘distributed ledger’, the idea behind a blockchain is fairly straightforward: a publicly verifiable, tamper-proof record of all transactions on a network. Unlike traditional networks which are often hosted on centralized servers, blockchains are maintained by a decentralized network of ‘nodes’. Each [node](https://en.wikipedia.org/wiki/Node_\(networking\)) records its own copy of the network, and these nodes are in communication with one another to ensure that there is consensus between them. |
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| ### Cryptocurrency mining | ==== Cryptocurrency mining ==== |
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| Cryptocurrencies are created through a process called ‘mining’. Bitcoin and many other coins utilize a system called [proof-of-work (PoW)](https://en.bitcoin.it/wiki/Proof_of_work) mining, in which ‘miners’ compete with one another in a race to solve an extremely difficult computational puzzle. The first miner to find the solution is given the right to add the next block to the chain and is rewarded with newly minted coins. | Cryptocurrencies are created through a process called ‘mining’. Bitcoin and many other coins utilize a system called [proof-of-work (PoW)](https://en.bitcoin.it/wiki/Proof_of_work) mining, in which ‘miners’ compete with one another in a race to solve an extremely difficult computational puzzle. The first miner to find the solution is given the right to add the next block to the chain and is rewarded with newly minted coins. |
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| The actual ‘work’ in PoW mining is done by powerful computers that require [extraordinary amounts of energy](http://lowimpactorg.onyx-sites.io/how-much-electricity-does-bitcoin-consume-and-what-are-the-alternatives/). This is one of the main problems with cryptocurrencies, as many environmentalists consider them a contributing factor to global climate change. | Although Satoshi intended that everyone could allocate a portion of their computer's processor to mining and the mining rewards would therefore be allocated randomly to users, mining quickly became a specialist activity requiring special chips, data centres, cooling systems and cheap electricity. By about 2017 Bitcoin alone was reportedly using as much electricity as a [smallish country](http://lowimpactorg.onyx-sites.io/how-much-electricity-does-bitcoin-consume-and-what-are-the-alternatives). This is one of the main problems with cryptocurrencies, as many environmentalists consider them a contributing factor to global climate change, while advocates say the wasted energy is 'worth it' or argue that Bitcoin could be beneficial for environment if by helping to load balance the grid, using electricity that was already being wasted, it could help finance the adoption of renewable energy. |
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| It is for this reason (among others) that many cryptocurrencies utilize alternative mining algorithms, the most popular of which is called [proof-of-stake (PoS)](https://hackernoon.com/what-is-proof-of-stake-8e0433018256). In contrast to PoW, PoS mining skips the puzzle altogether and simply gives out newly mined coins randomly to users based on the amount of the cryptocurrency they have ‘staked’ on the network. Cryptocurrencies that make use of PoS (or variants of PoS) mining include [EOS](https://eos.io/) and [FairCoin](https://fair-coin.org/). | Other mining algorithms were soon designed such as [Proof of Stake](https://hackernoon.com/what-is-proof-of-stake-8e0433018256) and no new coins these days use proof of work. Unfortunately Bitcoin's internal politics, dominated by the very people consuming the electricity, has made it unable to switch, as did the second most successful cryptocurrency, Ethereum. |
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| It should be pointed out that while PoS algorithms are widely considered to be more environmentally friendly than PoW systems, they have still faced criticism for their tendency to give even more money to those who already have the most on the network. | |
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| {{ https://lowimpactorg.onyx-sites.io/wp-content/uploads/crypto1.png }} | {{ https://lowimpactorg.onyx-sites.io/wp-content/uploads/crypto1.png }} |
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| | ===== What are the benefits of cryptocurrencies? ===== |
| | A technology like this is very disruptive, which means that it creates many winners and losers, and can change the political landscape. It took a while, but government have largely managed to prevent cryptocurrencies from undermining their own fiat currencies, or from spreading too much freedom! |
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| | - **Disruptive to the global financial system:** By allowing users to engage in direct, peer-to-peer transactions, cryptocurrencies eliminate unnecessary middlemen in financial transactions. Additionally, cryptocurrencies will never be subject to the whims of bank executives or politicians. Some cryptocurrency enthusiasts believe that widespread cryptocurrency adoption will be a key part in doing away with banks and government-controlled money altogether, but this author contends they haven't understood what finance is, what is the role of money within finance, and that you can't build a financial system with just payments and without counterparty risk. |
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| ## What are the benefits of cryptocurrencies? | - **Privacy:** while anyone can create a wallet and use it without furnishing the authorities with 3 types of proof of identity, governments and rogue actors can usually work out who is using a wallet through routine internet surveillance. Nonetheless a crypto payment doesn't pass through a handful of institutions, doesn't require authorisation and for practical purposes can be considered private unless you are a person of interest. |
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| - **Disruptive to the global financial system:** cryptocurrencies by their very nature take power away from traditional financial institutions and give it to the people. By allowing users to engage in direct, peer-to-peer transactions, cryptocurrencies eliminate unnecessary middlemen in financial transactions. Additionally, cryptocurrencies will never be subject to the whims of bank executives or politicians. In fact, Bitcoin was largely inspired by the failures of the global financial system in the 2008 recession. Some cryptocurrency enthusiasts believe that widespread cryptocurrency adoption will be a key part in doing away with banks and government-controlled money altogether. | - **Internationality:** cryptocurrencies are not limited to the jurisdiction of any particular country or organization and are therefore the world’s first truly international forms of currency. This characteristic brings with it numerous possibilities as a tool in bringing about positive change in the world. For example, individuals in countries with severe economic struggles like [Venezuela and Iran](https://www.forbes.com/sites/johntamny/2018/05/20/collapsing-iran-and-venezuela-mock-the-feds-definition-of-inflation/#fe491731eb4f) have the option of turning to cryptocurrencies as alternative stores of value to their countries’ rapidly depreciating fiat currencies. Cryptocurrencies are also widely used as a vehicle for remittances because they do not charge additional fees for international transactions. 7th-ranked cryptocurrency [Stellar](https://www.stellar.org/) (XLM), for example, has a particular focus on remittances. |
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| - **Privacy:** while most cryptocurrencies are not completely anonymous, they provide much more privacy than traditional online payments. Every time you pay for something using a normal credit or debit card, your bank maintains a record of that purchase that goes alongside all of the personal information they have in your account. Cryptocurrencies, on the other hand, include very few details about the participants or purpose of each transaction. While this [‘pseudoanonymity’](https://en.wikipedia.org/wiki/Pseudonymity) has earned cryptocurrencies a rather unsavory reputation due to their potential use in money laundering, the vast majority of cryptocurrency transactions are used for perfectly legitimate purposes. | - ** Alternative to gold. It turns out that the originally analogy with gold was prescient. Bitcoin has become a financial asset in a class very similar to gold, with the advantage that it costs next to nothing to transport and have custody of. |
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| - **Internationality:** cryptocurrencies are not limited to the jurisdiction of any particular country or organization and are therefore the world’s first truly international forms of currency. This characteristic brings with it numerous possibilities as a tool in bringing about positive change in the world. For example, individuals in countries with severe economic struggles like [Venezuela and Iran](https://www.forbes.com/sites/johntamny/2018/05/20/collapsing-iran-and-venezuela-mock-the-feds-definition-of-inflation/#fe491731eb4f) have the option of turning to cryptocurrencies as alternative stores of value to their countries’ rapidly depreciating fiat currencies. Cryptocurrencies are also widely used as a vehicle for remittances because they do not charge additional fees for international transactions. 7th-ranked cryptocurrency [Stellar](https://www.stellar.org/) (XLM), for example, has a particular focus on remittances. | |
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| - **Resilience:** because of their decentralized structure, cryptocurrency networks will never be brought down due to the failure of a centralized server. | - **Resilience:** because of their decentralized structure, cryptocurrency networks will never be brought down due to the failure of a centralized server. |
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| - **Non-inflationary:** many cryptocurrencies are explicitly designed to be non-inflationary, meaning that the value of your cryptocurrencies will not be manipulated by the Federal Reserve or any other faceless financial institution. | |
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| {{ https://lowimpactorg.onyx-sites.io/wp-content/uploads/crypto4.jpg }} | {{ https://lowimpactorg.onyx-sites.io/wp-content/uploads/crypto4.jpg }} |
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| | ==== ... and the problems? ==== |
| ### ... and the problems? | |
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| In spite of the above benefits, cryptocurrencies are also not without their problems. Two such problems were described above: the exorbitant energy consumption of PoW mining and the wealth-centralization of PoS mining. | In spite of the above benefits, cryptocurrencies are also not without their problems. Two such problems were described above: the exorbitant energy consumption of PoW mining and the wealth-centralization of PoS mining. |
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| Another problem with cryptocurrencies is the fact that most users will still use banks or other traditional payment providers to buy their cryptocurrency in the first place. It is possible to buy Bitcoin with cash through Bitcoin ATMs or to use peer-to-peer websites like [LocalBitcoins](https://localbitcoins.com/) (which will put you in contact with sellers in your geographic area), but these methods are more difficult than simply using an exchange that allows you to buy cryptocurrencies through a standard wire transfer. This is of course a significant drawback if the ultimate goal of cryptocurrencies is to do-away with traditional financial institutions. | Another problem with cryptocurrencies is the fact that most users will still use banks or other traditional payment providers to buy and sell their cryptocurrency in the first place. This is the choke point used by regulators to separate the crypto and fiat domains. It is possible to buy Bitcoin with cash through Bitcoin ATMs or to use peer-to-peer websites like [LocalBitcoins](https://localbitcoins.com/) (which will put you in contact with sellers in your geographic area), but these methods are more difficult than simply using an exchange that allows you to buy cryptocurrencies through a standard wire transfer. This is of course a significant drawback if the ultimate goal of cryptocurrencies is to do-away with traditional financial institutions. |
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| Perhaps the biggest shortcoming of cryptocurrencies, however, is their volatility. It’s true that cryptocurrencies are less volatile than the currencies of some countries, but only for countries in the most dire of economic circumstances. For people in most parts of the world, cryptocurrencies are significantly more volatile than their local fiat currencies. Most cryptocurrency enthusiasts argue that this volatility is a byproduct of cryptocurrency’s limited adoption, meaning that this issue will likely improve over time. | Perhaps the biggest shortcoming of cryptocurrencies, however, is their volatility. It’s true that cryptocurrencies are less volatile than the currencies of some countries, but only for countries in the most dire of economic circumstances. For people in most parts of the world, cryptocurrencies are significantly more volatile than their local fiat currencies. Most cryptocurrency enthusiasts argue that this volatility is a byproduct of cryptocurrency’s limited adoption, meaning that this issue will likely improve over time. |
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| ## What can I do? | ===== What can I do? ===== |
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| Although cryptocurrencies and their underlying technologies can seem complicated, actually buying and using cryptocurrencies is fairly straightforward. | Although cryptocurrencies and their underlying technologies can seem complicated, actually buying and using cryptocurrencies is fairly straightforward. |
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| The first step is deciding which cryptocurrency you would like to purchase. For those who are completely new to cryptocurrency, Bitcoin is the obvious first choice; it is the oldest, the biggest and the most trusted coin on the market today. Bitcoin is also great for beginners because there are abundant resources online to help you, should you ever have any questions. | The first step is deciding which cryptocurrency you would like to purchase. For those who are completely new to cryptocurrency, Bitcoin is the obvious first choice; it is the oldest, the biggest and the most trusted coin on the market today. Bitcoin is also great for beginners because there are abundant resources online to help you, should you ever have any questions. |
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| Given Bitcoin’s reliance on PoW mining, however, you may want to consider other cryptocurrencies that utilize more sustainable models. EOS, Stellar, and Ethereum (once Ethereum switches to PoS mining) are all viable options among the top cryptocurrencies with significantly lower energy demands—though there will likely be fewer online resources available if you have questions about these projects. | |
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| ## Further resources | ===== Forum ===== |
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| | This topic belongs to the section [[gt:digital|Digital & media]]. You can ask questions or add information on the corresponding [Forum section](https://forum.growingthecommons.org/t/digital). |
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| | It is also in the section [[gt:economy|Economy & finance]] (Forum: [Economy & finance](https://forum.growingthecommons.org/t/economy)). |
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| | ===== Further resources ===== |
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| - [Coin Central](https://coincentral.com/) - news and analyis | - [Coin Central](https://coincentral.com/) - news and analyis |
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| ## Related topics | ===== Related topics ===== |
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| - [Blockchain](https://knowledge.growingthecommons.org/doku.php/bloc/blockchain) | |
| - [Local currencies](https://knowledge.growingthecommons.org/doku.php/lcur/local_currencies) | |
| - [Low-impact money](https://knowledge.growingthecommons.org/doku.php/limo/money) | |
| - [Credit commons](https://knowledge.growingthecommons.org/doku.php/crco/credit_commons) | |
| - [Mutual credit](https://knowledge.growingthecommons.org/doku.php/mucr/mutual_credit) | |
| - [Credit unions](https://knowledge.growingthecommons.org/doku.php/crun/credit_unions) | |
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| | - [Blockchain](bloc:blockchain) |
| | - [Local currencies](lcur:local_currencies) |
| | - [Collaborative finance](cofi:collaborative_finance) |
| | - [Credit commons](crco:credit_commons) |
| | - [Mutual credit](mucr:mutual_credit) |
| | - [Credit unions](crun:credit_unions) |
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| ## Specialist curators of this topic | |
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| | ===== Specialist curators of this topic ===== |
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| | * [[user:matslats|Matthew Slater]] of [[https://creditcommons.org|CreditCommons.org]] |
| | * [[user:mrauchs|Michel Rauchs]] |
| | * [[user:dil|Dil Green]] of [[https://www.mutualcredit.services/|Mutual Credit Services]] |