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What Makes Cryptocurrencies Different?

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Abstract

Permissionless blockchains, which support the most popular cryptocurrency networks like Bitcoin and Ethereum, have shown that it is possible to transfer value without relying on centralized trusted third parties, something that is new and remarkable (although perhaps most clearly useful for less developed financial markets). What makes permissionless blockchains able to transfer value without relying on a small number of trusted third parties is the combination of several components that all need to work together. The components themselves are not particularly new, but the combination of these components is more than the sum of its parts. In this post, we provide a high-level overview of these components and how they interact, taking Bitcoin as an example.

Suggested Citation

  • Anders Brownworth & Jon Durfee & Michael Junho Lee & Antoine Martin, 2023. "What Makes Cryptocurrencies Different?," Liberty Street Economics 20230816, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:96570
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    File URL: https://libertystreeteconomics.newyorkfed.org/2023/08/what-makes-cryptocurrencies-different/
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    More about this item

    Keywords

    cryptocurrencies; Crypto; digital currencies; Bitcoin; blockchains; permissionless; trust;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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