Cryptocurrencies, or “digital coins”, enable the instant transfer of money by means of electronic networks. These currencies may be used for the purchase of physical commodities, but they are also increasingly used for transactions across the Internet.
There are many cryptocurrencies available on the market, with two of the most renowned hitting the headlines on a daily basis – Ethereum and Bitcoin.
While nobody actually “owns” Ethereum, the technology is supported and managed by means of a distributed network. This coding platform is necessary to drive the cryptocurrency, providing a pathway for the decentralized applications that run on the system. Like running a bank account, Ether owners hold their funds in virtual accounts that they can transfer to other Ether owners. Each transaction contains its own set of rules, or “smart contract” that enables a user to transfer any asset without recourse to an agent or intermediary. A good analogy is to think of a vending machine. Put a token in the slot and select the snack you want to buy without the requirement of using a shopkeeper, on identifying payment the vending machine is then programmed to release the requested snack. Smart contracts not only specify how a transaction is performed, but they also impose those rules using “blockchain” principles.