What is a cryptocurrency? – Capital.fr

What is the principle of cryptocurrency?

Definition of virtual currency

The term cryptocurrency designates a digital currency, exchangeable peer to peer, and generally issued on a decentralized computer register, called a blockchain.

Invention of cryptocurrency

In reality, the concept dates back to the 1990s, with digital currency experiments like Digicash by developer David Chaum, or that of Bit Gold, invented by Nick Szabo.

However, it was from 2008 with the invention of Bitcoin, by a pseudonym called Satoshi Nakamoto (whose identity is still unknown today), that the concept of cryptocurrency truly became popular.

Is cryptocurrency legal in France?

In France, cryptocurrencies are not currently considered currencies, like the euro or the dollar. They are governed by article 54-10-1 of the monetary and financial code, which came into force in 2019 with the Pacte law.

This article defines digital assets, therefore cryptocurrencies or any other digital token (for example, an NFT), as “any digital representation of a value which is not issued or guaranteed by a central bank or by a public authority, which is not necessarily attached to a legal tender currency and which does not have the legal status of a currency.

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However, investing in these virtual currencies is legal, which “remains risky and many scammers operate on the internet”, notes the Financial Markets Authority (AMF). The AMF also lists scam sites linked to crypto-assets.

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How does cryptocurrency work?

Cryptography

We talk about cryptocurrency because these currencies are based on encryption techniques, cryptography. To summarize, a cryptocurrency like Bitcoin applies a method which consists of encrypting a message using one key and decrypting it with another.

This is also why there is a question of pseudonymity: the user addresses are derivatives of these keys, which consist of alphanumeric sequences and are difficult to read for ordinary mortals.

Blockchain

Transactions between users are done peer-to-peer, without a central authority. They are most often conveyed by a blockchain, that is to say a large decentralized register between several computers (from ten to several tens of thousands, depending on the type of cryptocurrencies) which can be consulted by everyone and supposedly immutable.

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Censorship-resistant operation

This absence of central authority and this way of distributing information makes, in a case like Bitcoin, its use resistant to censorship. This means that a user will be able to transmit an amount to the person of their choice, without the risk of this transaction being blocked by a third party.

However, in the case of a less decentralized cryptocurrency (controlled by a smaller number of participants), the risk of censorship remains, even if this scenario remains rare.

How many cryptocurrencies are there?

Thousands of crypto-assets

According to the cryptocurrency census sites, Coinmarketcap and Coingecko, there are between 9,000 and 10,000 cryptocurrencies. But in reality, most are inactive, because abandoned by their creators and/or communities.

Bitcoin and Ethereum, the main cryptocurrencies

The main cryptocurrency still remains Bitcoin, which also dominates the market with a share accounting for more than 49% of the total capitalization of the crypto market, followed by Ethereum.

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Bitcoin Cash or Bitcoin SV, digital currency derivatives

It should be noted that many of these cryptocurrencies are copies or derivatives of originals. Thus, there are cryptocurrencies like Bitcoin Cash or Bitcoin SV, created due to disputes with developers and most of the Bitcoin community.

We can also cite:

• Ethereum Classic, the original (but less used) version of Ethereum;
• Namecoin;
• Litecoin;
• Dogecoin presents a very similar code, the basis of which was itself greatly inspired by Bitcoin;
• BNB or Tron were initiated by largely copying Ethereum’s code.

Bitcoin or Litecoin, payment networks

As for use cases, there are several: some like Bitcoin or Litecoin were created to become payment networks (even if this pattern has dissipated somewhat for Bitcoin, becoming more of a treasury asset).

Monero or ZCash, for anonymous transactions

Currencies like Monero or ZCash claim a similar use case, but with additional transaction confidentiality, with greater or lesser efficiency (with the exception of Monero, few cryptos described as anonymous really are).

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Ethereum, Fantom or Cosmos, to create applications

Finally, there are blockchains used as a form of decentralized operating system on which it is possible to create applications (or dApps, for decentralized applications): this is the case of Ethereum, Fantom, Cosmos, Polkadot, etc.

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What are the consensuses used in cryptocurrencies?

Definition of consensus

In the case of a blockchain, consensus refers to the mechanism accepted by all parties to create and use the network, in short the rules of the game which define the legitimate participants and the cheaters.

The proof-of-work

The best known consensus is that used by Bitcoin: proof-of-work. This mechanism, already at work at the time of Bit Gold, requires participants, in this case computers, to execute a task (in fact a calculation) in order to integrate the network and validate user transactions.

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By performing the calculation, it creates – or mines – a block into which pending transactions are inserted. For this work, this miner receives a reward (currently 6.25 bitcoin per block found – or more than 130,000 euros) and collection fees on network user transactions.

This proof of work is expensive in energy since hundreds of thousands of computers compete to create blocks. Which makes this consensus a mechanism criticized for its environmental impact.

What impact do cryptocurrencies have on the environment?

The impact of bitcoin mining

According to the most recent calculation from the University of Cambridge, the consensus consumes between 70 and 100 TWh per year, i.e. the consumption of countries like Belgium or Finland.

But it remains lower than that of a state like California. However, some observers like this Bloomberg analyst believes that the mix of renewable energies in bitcoin mining is growing and that its economic weight could encourage States and institutions to accelerate their energy transition.

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Proof-of-stake, a less energy-consuming consensus

However, not everyone is convinced by this perspective and this is why other, less energy-intensive consensuses exist, notably that of proof-of-stake, or proof of stake.

This mechanism encourages participants to sequester a certain number of cryptocurrencies in order to participate in its security. In the event of cheating, the stake is lost.

On the other hand, in the event of good behavior, participants are rewarded by receiving new tokens. The analogy with a savings account is undoubtedly the closest thing to this mechanism. After operating from 2016 to 2022 on proof of work consensus, Ethereum has since adopted proof of stake.

It is important, however, to emphasize that proof of stake is also criticized for its tendency to centralize the forces involved since the larger the wallets, the more they are rewarded and have weight on the network.