A Short Introduction to the World of Cryptocurrencies by Aleksander Berentsen and Fabian Schar

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 specific

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 

of value circulating in the economy are always clearly established, without a central authority
needing to keep accounts. Furthermore, any agent can participate in a cash payment system;
nobody can be excluded. There is a permissionless access to it. Cash, however, also has disadvantages.

Buyers and sellers have to be physically present at the same location in order to
trade, which in many situations makes its use impracticable.
1.2 Digital Cash
An ideal payment system would be one in which monetary value could be transferred
electronically via cash data files (Figure 2). Such cash data files retain the advantages of physical
cash but would be able to circulate freely on electronic networks.1
 A data file of this type could
be sent via email or social media channels.
A specific feature of electronic data is that it can be copied any number of times at negligible cost.

This feature is highly undesirable for money. If cash data files can be copied and
the duplicates used as currency, they cannot serve as a payment instrument. This problem is
termed the “double spending problem.”
1.3 Electronic Payment Systems
To counteract the problem of double spending, classical electronic payment systems are
based on a central authority that verifies the legitimacy of the payments and keeps track of
the current state of ownership. In such systems, a central authority (usually a bank) manages
the accounts of buyers and sellers. The buyer initiates a payment by submitting an order. The 

A Short Introduction to the World of Cryptocurrencies by Aleksander Berentsen and Fabian Schar