Cryptocurrency: Introduction, Technological Developments, Disruption, Innovation Theory and Success, Innovation Failure

Cyrptocurrency
Compiled By
Student’s Name
Institution
2018
1
Name and student number

1. Introduction to Cryptocurrency
Cryptocurrency is a digital currency that is used as an exchange medium. It is built on top of
cryptography, a technology designed to secure and validate transactions (Narayanan 2016).
This technology also controls the cryptocurrency units created. In other words,
cryptocurrency is limited database entries that cannot be changed.
In the recent past, various cryptocurrencies have emerged and gained popularity. Among
these is Bitcoin, one of the most popular cryptocurrencies that has the largest market share.
These currencies operate in a decentralized network where all participants have to do their
tasks. This is performed through blockchain – a ledger containing all transactions that have
occurred within the network. This ledger is public and can be seen by everyone.
Transactions are files which contains public keys of both the sender and recipient as well as
the number of coins sent (Surowiecki 2011 pp.106). The sender has to sign off a transaction
with his/her private key. This is the basic concept of cryptography. Once a transaction is
signed, it is broadcasted on the network but it has to be confirmed first. This is done by
miners who confirm a transaction by solving a puzzle. They verify transactions and send
them across the decentralized network. These transactions are added to databases of all nodes
within the network. When a transaction is completed, it is irreversible and miners get a
reward.
Cryptocurrency network can only work is all participants agree to the validity of transactions
and balances (Hileman 2017). If any network node does not conform to the others, the
network breaks. However, there are pre-built rules in the network that prevent such scenarios
from occurring. A consensus among participants is guaranteed by the strong cryptography
used in the network which makes third parties completely irrelevant.
2
Name and student number

2. Technological developments
Blockchain technology is the drive behind the growth and success of cryptocurrencies.
Essentially, it’s a public database with verified and encrypted entries (Crosby 2016 pp.6). It
provides a secure and effective way of creating hack-proof activity logs. This technology has
come a long way since its entry into the public back in 2005. It was introduced by Wei Dai
who proposed the idea of creating money through puzzle solving and consensus in a
decentralized network. However, the proposal was not effectively implemented. Later, Hal
Finney came up with a centralized cryptocurrency concept based on Wei’s idea and
computational puzzles (Zheng 2016).
Blockchain gained recognition when Satoshi Nakamoto wrote a whitepaper outlining a
protocol for creating a decentralized currency. He emphasized on operating it in a network
based on absolute consensus among participants instead of being controlled by a set of
individuals (Wright 2015). Within a few years, the idea became an economic experiment
attracting many experts. This led to the emergence of cryptocurrencies such as bitcoin whose
value grew rapidly as they gained interest.
While Bitcoin became popular, it had various issues such as wasteful mining hardware which
undermined its effectiveness. In 2012, Vitalik proposed an open platform where developers
could build a distributed application for blockchain (Buterin 2013). This was the start of
Ethereum platform which became wildly popular among entrepreneurs. However, its goals
have been tough to meet as its market cap increased rapidly. However, there are projects
being experimented that could be integrated into the network in the future to overcome
current limitations faced.
In the recent past, newer blockchain technologies have emerged to improve the capabilities of
cryptocurrency networks and overcome hurdles faced. IOTA is one of the new blockchain
3
Name and student number

technology that was designed as cryptocurrency platform for the Internet of Things (IoT). It
incorporates massive changes to the fundamental blockchain concepts allowing zero-fee
transactions and supporting a robust verification process that can resolve scalability problems
faced by many cryptocurrency networks. There are some companies that have blockchain
technology for specific purposes. QTUM has leveraged Bitcoin’s and Ethereum’s
infrastructure to craft a business-centric blockchain. Such kind of development has pushed
blockchain technology beyond expectations empowering cryptocurrency.
3. Disruption
Cryptocurrency has disrupted financial services industry as more people used it for buying
goods and investing. When Bitcoin and other cryptocurrency coins first emerged, very few
merchants accepted them. Nowadays, the situation has changed as they’ve become a popular
medium exchange. Currently, there are many merchants that accept Bitcoin. They range from
e-commerce stores to groceries. Many people are using bitcoin to pay for products and even
degrees (Chuen 2015). Other cryptocurrencies such as Ethereum and Ripple aren’t as widely
used as Bitcoin but this could change in the near future as more firms start accepting them.
Apple has led the way by allowing App Store users to pay with different cryptocurrencies.
Also, users have an option to convert their coins for bitcoins. Furthermore, there are websites
that sell gift cards in exchange for cryptocurrencies. With gift cards, people can buy anything
they need with their digital currencies.
Given the massive popularity of cryptocurrencies, merchants have sought to tap into this
opportunity. Many are accepting cryptocurrencies from their customers as a form of payment.
With the rising of crypto-ATMs in different parts of the world, more customers are using
digital currencies for their purchases (Rick 2014). Businesses are leveraging various services
to accept payments. CoinPayments is a great example of one of the services helping
4
Name and student number