In an era when the usual cash transactions, the usual cash in exchange for digital currencies, and digital currencies in exchange for digital currencies in exchange for foreign currencies - digital currency - digital currency - have been welcomed, accepted, and digital currency and digital currency to different levels transferable image to deal with.
The concept of cryptography
Before getting to know digital currencies or encrypted currencies, let's get acquainted with the science of cryptography or cryptography, which is attributed to the method of creating and using these currencies.
Cryptography is basically a way to protect information and data through the use of codes, so that only those who target the information can read it or know its hidden content and have the code key that enables them to process those codes to identify the original information. The word cryptography can be translated by dividing it into crypt, which means hidden, and graphy, which means writing, meaning that what is meant by the term is that it is written content in a way that conceals its content.
That is, hiding data from its usual and circulating context to another context that is not known to the public in a way that preserves the confidentiality of its content, and it is not a new process. The principle of encryption was used in many diplomatic and military fields in the past and has many banking and informational uses in our contemporary time, until we reached digital currencies that depend on Building it on the same idea.
The difference between decryption and cryptanalysis
Opposite to encryption is decryption, which is the return of the encrypted context to the image of the initial content in its usual context read from the public before the encryption process, and this is done using the encryption key.
With the development of mathematics, computer sciences, and communications, the encryption and decryption process has become based on complex computational algorithms that are difficult to solve. Through the known informational means that currently exist, and this is the reason why the assumption of its security and confidentiality has been proven until now.
This is known as cryptanalysis or Cryptanalysis, which means the study of decoding encryption algorithms and their applications to obtain the content and source of encrypted information or assets without access to the key required to do so.
That is, we can shorten the difference between Decryption and Cryptanalysis to the fact that decoding means returning the encrypted context of symbols to its first state using the cipher key prepared from the beginning to retranslate these symbols to what they were, while cryptanalysis is the attempt to decipher those symbols By trial and error a huge number of times to come up with a cryptographic algorithm solution to translate the encrypted symbols and know the original context without knowing the key.
How did the idea of electronic cash transactions begin?
Based on the idea of encryption and decoding, as well as code analysis, the idea of creating digital currencies was born Cryptocurrency, that is, the digital virtual currency that was encrypted for safe and confidential transactions, as it is created and stored electronically without the presence of a supervisory authority or a central bank that controls it, and there is no tangible physical entity like currencies Other regular or so-called fiat money issued by central banks, such as the Saudi riyal SAR, the euro EUR, or the US dollar USD.
The idea of digital or electronic dealings as an alternative to the usual cash dealings began in the late eighties in the Netherlands in a series of fuel stations or petrol stations on the highway in which many thefts were taking place, and the administration tried to find a solution to this problem, so the administration sought the help of a group of programmers and developers to link money to cards Especially through which the holders of drivers who wish to deal with these stations can obtain fuel from them without the need to deal with paper money in those stations, and thus there is no or at least the money from the stations will be greatly reduced in order to reduce theft cases, after which the idea of the birth of smart money cards developed, Which used to reflect the idea of money kept electronically encrypted in the card, while the gas station has a device to decode that code, which is the point of sale or what is known today as the idea of POS or point-of-sale. This is the first form of electronic money that has evolved to reach what it has reached now.
The beginning of the idea of digital currencies or cryptocurrencies
Complementing the idea of electronic transactions, and almost at the same time or a little before, there was an idea wandering around in the head of an American software named David Chaum. To a safe and private hand, he devised an algorithm formula through which money could be passed between the sender and the recipient in a hidden, untracked manner via a token currency that he called at the time Chaum. After that, Chaum established DigiCash as a basic evidence for the implementation of that process, which lasted for years until he fell into several mistakes that caused DigiCash to go bankrupt in 1998. 1998, however, he had laid a solid foundation for the idea of algorithmic formulas for token money transactions or digital currencies.
In continuation of the same idea, another software named Wei Dai begins to propose the idea of an integrated, hidden, untracked monetary system that achieves the idea of privacy and security. It is called B-money, where dealing is done through symbolic pseudonyms for currency analysis within a decentralized network, and he has already presented the paper The whitepaper for his project, however, the idea did not receive the required welcome and popularity, so it was not able to succeed, and it is worth noting that the presentation paper presented by Satoshi Nakamura for the idea of Bitcoin - which we will talk about in detail in a later article - contained some of the elements that were mentioned in the whitepaper For the B-money project, which means that it was the real start of the race towards the development of digital currencies.
The emergence of digital currencies
After the path became paved for the creation of digital currencies, and with the technological and informational development, complex encryption protocols were born based on the principles of mathematics and advanced computer engineering that theoretically make it almost impossible to break, on which digital currency programmers relied through very complex coding systems that encrypt data transfers to secure units Its own exchange, in addition to its ability to hide the identity of its dealers, which makes transactions, transfers, and money flows anonymous, in order to achieve the principle of privacy, which has been the main endeavor since the beginning.
Thus, we can say that the digital currency is a software computer program, but it is a decentralized program, that is, it is not installed or built on one particular device, but rather it is distributed, which means that it is hosted on many computers for many individuals around the world instead of hosting on a single server by a specific individual or company.
The supply and value of cryptocurrencies is controlled by the activities of its users through codes of highly complex cryptographic protocols. Every function or transaction, from how transactions are recorded to how data is stored, is boiled down to special software code that is usually stored in a type of database known as a chain. Blocks - Blockchain, which is considered a comprehensive, distributed, protected and hidden record of all digital currency data and transactions. By processing these algorithms in general, the digital currency is granted to the user who adds transactions to the block chain network or the blockchain. The process of adding transactions to the blockchain is known as Mining. .
It remains to know that one of the most important features of most digital currencies, but not all of them, is that they have limited numbers of units. That is, most digital currencies were produced on the idea that they have a market cap, meaning that the process of coding the creation protocols from the beginning created a specific number of currencies With each decryption process - or mining by adding a transaction - the number of stocks gradually decreases, and this is similar to the idea of precious metals, for example, the more gold is extracted, the less reserves are stored in the ground. It becomes difficult for miners to produce digital currency units, until the upper limit is reached and minting stops completely.
To understand this in a simpler way, Bitcoin is one of the most famous digital currencies, and the highest value currently. As a digital currency, it was encrypted from the beginning, provided that the code contains only 21 million pieces, and once all of them are finished mining or extracted, there will be no new Bitcoins, that is, no new Bitcoins will be created. Printing new money as it happens in other regular currencies, and this means that if you own 1 bitcoin, this means that you own 1/21,000,000 of the world's total wealth of bitcoin.
Advantages of digital currencies
Below we list the most important advantages of dealing in digital currencies, which have emerged with their spread in the recent period
1. Protected from loss of value, or inflation
Inflation is the scourge of the world's economies, and many regular currencies have faced and are facing the risk of inflation, but the idea that digital currencies are produced on the basis of defining a market cap for them, and a limited amount of them, increases with the high demand for them, their value in line with the market, and protects them from inflation in the long run the long
2. Self-control and sustainable maintenance
The management and maintenance of any currency is one of the main factors in its development and sustainability. In cryptocurrencies, transactions are stored by miners in the blockchain network on their computers, and in return they receive the currency itself as a reward for that. Therefore, they keep accurate and frequently updated transaction records, keeping the digital currency safe and its record decentralized.
3. Security and privacy
It can be said, based on what we mentioned in our article here from the beginning, that they were the main motivation for building digital currencies from the ground up, so the records of the blockchain network are based on different encryption algorithms that are difficult to decipher or analyze. This makes the digital currency more secure than regular electronic transactions, in addition to using pseudonyms or account numbers that are not associated with any user, account, or stored data that can be linked to a profile, in order to achieve the principle of privacy.
4. Easily exchange currencies
One of the very important advantages, which gave digital currencies a real value in the midst of physical transactions, where they can be exchanged for regular currencies as a corresponding exchange value, which means that each of them has a variable exchange rate with the major global currencies - such as the US dollar USD, the pound sterling GBP, the euro EUR or the yen The Japanese JPY - which helped in its spread, acceptance and demand as an alternative to the usual monetary transactions, and equivalent to them in value.
5. Decentralization
Unlike regular currencies or fiat currencies controlled by governments represented by central banks, digital currencies are decentralized in nature and cannot be controlled, increased in number, stopped dealing with or made available except by those who use them and own the largest amount of them, or through the organization that created them. Or develop it before it is put on the market, which helps it to preserve it from monopoly and protect it from limiting flow or value to ensure its stability, privacy, transparency and security.
6. Low cost and speed of transfers
One of the main uses of digital currencies is to transfer money, and the cost or fees of transfers are among the most important factors that are considered to judge the quality of the system or the transfer process. directly between user accounts and quickly. So we don't need third parties, such as VISA or SWIFT, to verify the transaction. This eliminates the need to pay any additional transaction fees, or wait a long time.
Disadvantages of digital currencies
As it has advantages, dealing through digital currencies has some disadvantages that must be taken into consideration before dealing with or investing in them, as follows:
1. It is easy to use in illegal transactions
Absolute security and privacy, which were the most important characteristic of it, make it difficult for governments to track any user through his wallet address or know his data. illegally through a clean medium to hide its source.
2. Data loss may mean huge financial losses
The developers of digital currencies wanted to create source code with untraceable encryption algorithms and unhackable authentication protocols, with the aim of making keeping money via digital currencies more secure and confidential than traditional cash, but the flip side of this degree of privacy is that if any user loses the private key to access his wallet or his account, it cannot be restored. The wallet will remain locked to the coins in it, making it virtually lost
3. Some digital currencies cannot be exchanged for regular currencies
Which makes it lose the advantage of exchange, as some digital currencies can only be traded against one or certain currencies. This leads to forcing the user to convert these digital currencies to one of the main currencies, such as Bitcoin or Ethereum first, then through private exchanges, and then to the currency he wants. This only applies to a few digital currencies, so additional transaction fees or commissions may be added in the process, costing unnecessary money.
4. The negative effects of mining on the environment
5. Cryptocurrency exchanges are vulnerable to hacking
Despite the security and privacy of digital currencies, their trading exchanges are not that secure. Most exchanges store users' wallet data to properly operate their user ID. Professional hackers can infiltrate and access this data and also steal the digital currencies stored in it. Some exchanges, such as Bitfinex or Mt Gox, have been hacked in the past years and thousands of Bitcoin units have been stolen. Most exchanges are currently very secure, but there is always the possibility of another hack.
6. There is no refund or cancellation policy
Financial dealings in digital currencies are like other financial transactions. If there is a dispute between the parties involved, or if someone sends money by mistake to a wrong wallet address, the sender cannot retrieve the digital currencies sent. This could be used by many scammers to extort money. Since there are no refunds or returns in the process, it can easily create a transaction whose product or services were never received.
Today, there are more than 1,324 encrypted digital currencies in the market, which, although it is an electronic virtual currency, have spread in electronic transactions on the Internet and have been accepted in many international stores, especially Bitcoin.