Where Cryptocurrency Comes From
Cryptocurrency is created by code. In many cases, new coins are created when transactions are confirmed by a process known as mining.
With that said, while coins like Bitcoin and Ethereum use mining, not every cryptocurrency uses mining to generate new coins and coins can be created some other ways as well.
How exactly coins are created depends on what is defined by a given cryptocurrency’s code. For example, a cryptocurrency may create some tokens upon launch as developer rewards or a cryptocurrency may pay out tokens as dividends on a monthly basis.
More Points to Consider to Understand How Cryptocurrency is Created
Consider the following points:
- Cryptocurrency is software. Every function from how transactions are recorded, to how data is stored, is dictated by code.
- Especially for cryptocurrencies whose main function is to act as a money, cryptocurrency transactions are typically stored in a type of database known as a blockchain (other cryptos use unique technology, but the gist is the same).
- What we think of as cryptocurrency, for example 1 Bitcoin, is just numbers recorded on a cryptocurrency’s blockchain. Another word for that stand-in for value is “token” (often also called a “coin”).
- Cryptocurrencies are created by algorithms that rely on cryptography. That is why it is called “crypto” currency. Every transaction relates back to unique cryptographic codes that secure the network.
- Cryptocurrency software is decentralized and distributed, meaning it is hosted on many peoples’ computers across the world instead of just on one server by one company.
- The algorithms generally are written to award coins to computers who add transactions to the blockchain. The process of adding transactions to the blockchain is known as mining.
- The code of the cryptocurrency defines things like maximum supply, mining rewards, etc.
- Thus, for most cryptocurrencies, the main way new coins are created is by people all over the world running hardware that adds transactions to the blockchain. Otherwise, cryptocurrency tokens are created by other mechanisms contained in a cryptocurrency’s software.
- Lastly, the code for almost all cryptocurrencies is public, so anyone can check how coins are created.
FACT: Because the supply and inflation of a given cryptocurrency is defined by code, it is known upfront whether a coin is inflationary or deflationary. The only way to change that is to change the software. To change the software, the majority of computers running the software have to agree on an upgrade. In most cases something like a change to the rate of supply would result in a “fork” (a new version of the software). Given all of this, it is unlikely the supply or rate of issuance of a coin like Bitcoin would ever be changed. Thus, we can be confident the only coins that will ever be issued are the ones defined by the code.