Q: Let’s start simply. What even is cryptocurrency?
Martin: Cryptocurrencies are digital, or virtual, money. Bitcoin, which was created in 2009, is the first and probably the best known cryptocurrency, but many others have followed, such as Ethereum, Ripple, Bitcoin Cash, Litecoin, etc.
Q: Have cryptocurrencies made progress toward solving the problem of mistrust?
Martin: One important element in any payment system is “validation,” determining which transactions can proceed through the system and which should be refused as invalid. For example, a validator could check if there are sufficient funds in the account of the person who wants to make a payment. If there is, the payment will go through. But if there isn’t, the payment will be refused. If you recall the last time you swiped your credit or debit card, the few seconds you had to wait was that validation. But if the merchant doesn’t trust the validator, and doubts she will ultimately be paid, she’s unlikely to accept your card.
With bitcoin there isn’t one designated validator. Instead, everybody in the bitcoin network could be picked, essentially at random, to validate recent transactions. The details are a bit technical and more details can be found in a recent St. Louis Fed paper on cryptocurrencies.