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A Short Introduction to the World of Cryptocurrencies
Aleksander Berentsen and Fabian Schär
In this article, we give a short introduction to cryptocurrencies and blockchain technology. The focus
of the introduction is on Bitcoin, but many elements are shared by other blockchain implementations
and alternative cryptoassets. The article covers the original idea and motivation, the mode of operation
and possible applications of cryptocurrencies, and blockchain technology. We conclude that Bitcoin
has a wide range of interesting applications and that cryptoassets are well suited to become an
important asset class. (JEL G23, E50, E59)
Federal Reserve Bank of St. Louis Review, First Quarter 2018, 100(1), pp. 1-16.
https://doi.org/10.20955/r.2018.1-16
1 INTRODUCTION
Bitcoin originated with the white paper that was published in 2008 under the pseudonym
“Satoshi Nakamoto.” It was published via a mailing list for cryptography and has a similar
appearance to an academic paper. The creators’ original motivation behind Bitcoin was to
develop a cash-like payment system that permitted electronic transactions but that also
included many of the advantageous characteristics of physical cash. To understand the spe-
cific features of physical monetary units and the desire to develop digital cash, we will begin
our analysis by considering a simple cash transaction.
1.1 Cash
Cash is represented by a physical object, usually a coin or a note. When this object is
handed to another individual, its unit of value is also transferred, without the need for a third
party to be involved (Figure 1). No credit relationship arises between the buyer and the seller.
This is why it is possible for the parties involved to remain anonymous.
The great advantage of physical cash is that whoever is in possession of the physical object
is by default the owner of the unit of value. This ensures that the property rights to the units
Aleksander Berentsen is a research fellow at the Federal Reserve Bank of St. Louis and a professor of economic theory at the University of Basel.
Fabian Schär is managing director of the Center for Innovative Finance at the Faculty of Business and Economics, University of Basel.
© 2018, Federal Reserve Bank of St. Louis. The views expressed in this article are those of the author(s) and do not necessarily reflect the views of
the Federal Reserve System, the Board of Governors, or the regional Federal Reserve Banks. Articles may be reprinted, reproduced, published,
distributed, displayed, and transmitted in their entirety if copyright notice, author name(s), and full citation are included. Abstracts, synopses,
and other derivative works may be made only with prior written permission of the Federal Reserve Bank of St. Louis.
Federal Reserve Bank of St. Louis REVIEW
First Quarter 2018
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