What is a cryptocurrency / crypto asset? Easy-to-understand explanation even for beginners

cryptocurrency 11-20

◯What is virtual currency? ── Currency exchanged only with electronic data.

 

A virtual currency (cryptographic asset) is a currency that is exchanged only with electronic data, and unlike legal tender, it does not have compulsory currency (legal effect used as a means of repayment of monetary debt) by the state, and is mainly on the Internet. It is used for transactions on the above. Also known as digital currency. Since the advent of Bitcoin, which started operation in 2009, derivative virtual currencies called altcoin have been born one after another, and virtual currency exchange called virtual currency exchange that exchanges fiat currency and virtual currency With the advent of traders, the holding of cryptocurrencies has expanded rapidly.

◯Mechanism of virtual currency ── In many cases, there is no specific entity to manage.

The mechanism of virtual currency is different from ordinary legal tender, and in many cases there is no organization such as a state or a central bank to manage it. A method called peer-to-peer (P2P: Peer to Peer) is adopted mainly by those who handle virtual currencies, and transaction information is managed between users. Many virtual currencies have an upper limit on the number of issues, and the price fluctuates depending on the supply and demand for the circulation volume.

◯Features of virtual currency.

The characteristics of virtual currencies are summarized below (* However, it should be noted that the following description is based on Bitcoin, which is a typical example of virtual currencies).

1 There is no central administrator
Unlike fiat currencies, virtual currencies basically do not have a centralized issuer or manager that guarantees their value. It is characterized by the fact that the credit of the central bank guarantees the value in a way different from the legal tender that guarantees the value by a mechanism called blockchain that monitors transactions with all participants with P2P (* Suica, Pasmo, etc. Electronic money is an electronic version of the Japanese yen, and depends on the reliability of the Bank of Japan, the central bank that issues the legal tender, the Japanese yen).

2 There is an issuance limit
In the case of legal tender issued by the central bank, the number of issued currency can be changed according to the economic situation of the home country. On the other hand, there is no central administrator for virtual currencies, and it is basically impossible to change the number of issued cards. Therefore, many virtual currencies have a maximum issuance limit and are designed to maintain the value of money. For example, in Bitcoin, the maximum number of issued coins is set to 21 million.

3 Can be cashed
In the case of electronic money, it is not possible to convert it into legal currency such as Japanese yen, but virtual currency can be bought and sold at the market price at that time.

◯Usage of virtual currency.

The specific usage of virtual currency is as follows.

1 Investment / speculation
Cryptocurrencies are investment targets because their prices are not fixed. Therefore, it is possible to make a profit by making an investment in anticipation of a rise or fall in the price of virtual currency, which is considered to be promising in the future (reference: virtual currency is profitable). In addition, if the mechanism of virtual currency FX is utilized, it is possible to obtain an opportunity for monetization even when the price is falling. In addition, when investing, it is necessary to be careful because there is a risk of loss in transactions.

2 Remittance / settlement
Since the ownership of virtual currency can be transferred, it can be used for settlement. Shopping using virtual currency is possible at stores and websites that support virtual currency payment. In addition, by using virtual currency, overseas remittance can be performed at a low fee.

3 Distributed application development
Cryptocurrencies may also be used for decentralized application development. Specific examples include ETH in Ethereum.

◯Technical components of cryptocurrencies.

Taking Bitcoin, which is a typical example of virtual currency, as an example, its technical components are organized. Bitcoin is a mechanism that allows you to trade value on the Internet without the intervention of a third party such as a bank. I will omit the technical details, but to briefly explain the mechanism, “public key cryptography” prevents spoofing by a third party, and “blockchain” prevents double payment by the parties. It can be said that the point is that “mining” provided an economic incentive called mining reward to the miners (miners) who contributed to the operation of the blockchain. The above components will be described in order below.

1 Public key cryptography
The public key cryptosystem is an encryption method in which the encryption key can be disclosed by using separate keys for encryption and decryption. In public key cryptography, a pair of keys, a “public key” and a “private key,” is issued. The public key is generated from the private key, but the reverse is not possible. Anyone can use the public key freely, but only the owner of the key can use the private key. When sending Bitcoin, a character string called “address” for specifying the destination is generated from the public key, but in the Bitcoin system, the “public key” that anyone can use is used to generate the address. By using a “private key” that can only be used by the user himself as a signature for executing transactions, spoofing by a third party is prevented.

2 Blockchain
Blockchain technology was born in the process of Bitcoin development as a technology to realize a decentralized ledger that records Bitcoin transactions. Transaction data is called a “transaction”, and a collection of multiple transactions is called a “block”. The data structure in which these blocks are chained is the origin of the name blockchain. Unlike the general client-server method, in the case of blockchain technology, transaction data is monitored by an unspecified number of participants in the network, so even if double payment by the parties occurs, fraud is immediately fraudulent. It will be discovered and discarded as invalid data.

3 Mining
Mining is simply the process of adding blocks to the blockchain. A consensus algorithm called PoW (Proof of Work) is used for mining work in Bitcoin. This is a mechanism that uses a cryptographic hash function (SHA-256) to perform mathematical operations in order to activate the blocks generated by itself. The miner collects transactions to generate new blocks while validating the transactions. Approval work is performed that transactions that can be recorded in the block are recorded. When this approval work is completed, it will be recorded on the blockchain as a formal block. When the mining work to generate the block is completed, the miner who is the creator of the block can receive the block generation fee and the transaction fee recorded in the block as the mining reward.

◯Definition of virtual currency.

A virtual currency is a type of digital currency developed by utilizing cryptographic technology, and can be used as a consideration for goods or services among an unspecified number of people and companies on the Internet. The Funds Settlement Law legally defines virtual currencies as follows.

When purchasing, borrowing, or receiving services, it can be used for unspecified persons to pay these prices, and it is purchased and sold to unspecified persons. Property value that can be transferred using an electronic information processing organization
Property value that can be exchanged with the ones listed in the previous item against an unspecified person and can be transferred using an electronic information processing organization.
By the way, regarding the “digital yuan” being developed by the Chinese authorities, it was clarified by the director of the People’s Bank of China’s Digital Currency Research Institute, Changchun, that “it has a different nature from virtual currencies and stable coins.” Has been done. In China, the “People’s Republic of China Cipher Law” that came into effect on January 1, 2020 has established the minimum legal provisions for issuing digital currencies, and the foundation for issuing digital currencies is being laid. (Reference: Contents and significance of China’s “Cipher Law (Cipher Law)”. What is the intention of the Chinese government and the types of ciphers specified?). Although it deviates from the definition of virtual currency, it is necessary to pay more attention to the trend of central bank digital currencies including stable coins and the above-mentioned digital yuan.

◯History of cryptocurrencies.

The beginning of virtual currency dates back to October 2008 when a person named Satoshi Nakamoto published a treatise on Bitcoin on the Internet.
This paper inspires a large number of researchers / developers, and three months after its publication, Bitcoin was born in January 2009, and in February 2010, Bitcoin can be exchanged. Was established.

◯Cryptocurrency risk.

Among the risks that virtual currencies have, the typical ones are as follows.

1 Price fluctuation risk.
Since virtual currencies have large price fluctuations (volatility), changes in supply and demand balance, prices, natural disasters, wars, political changes, changes in laws and regulations, changes in the situation related to virtual currencies, other unexpected events and special cases Prices may fluctuate due to the effects of events. It is important to consider the magnitude of price fluctuations when conducting transactions.

2 Risk of loss of private key and password.
If you lose your wallet’s private key or password, you may not be able to access your virtual currency at all, so you need to be very careful.

3 Risk of theft due to cyber attacks.
If the private key is leaked from the exchange or the PC / smartphone owned by the exchange due to a cyber attack, the virtual currency held may be stolen by a malicious hacker.

4 Exchange bankruptcy risk.
If the virtual currency exchange cannot continue its business due to changes in the external environment, etc., the assets of the users who have deposited the assets on the exchange may not be returned depending on the system of the exchange.

5 Network trouble risk.
Cryptocurrency trading is completed when it is approved on the cryptocurrency network. Therefore, some trouble may occur on the network and the transaction may be canceled.

6 System failure risk.
If a system failure occurs in the exchange, the internet line used, the personal computer, etc., problems such as being unable to trade will occur (* If the exchange proves to be responsible, compensation may be provided).

7 51% risk of attack.
If a malicious miner occupies 51% of the hash rate of a particular virtual currency, there is a risk of fraudulent transactions (* However, if a consensus algorithm other than PoW is adopted, this is the case. Not as long).

8 Risk of changes in laws and tax systems.
Regarding the handling of domestic virtual currencies, laws and tax systems may change. As a result, problems such as falling virtual currency prices, suspension of transactions, and increased tax burden may occur.

 

 

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