Cryptocurrencies are digital currencies that work just like their traditional counterparts: People use them to make purchases or to receive funds from sales of goods or services. The difference between cryptocurrencies and traditional ones is that, in order for cryptocurrencies to work, an online network must facilitate and verify all transactions.
More than 21,000 cryptocurrencies are available for trading as of September 2022. If that seems unusually high, that’s because — unlike traditional currencies, which require government approval and backing — anyone can create a cryptocurrency. But not everyone will want to own or use them: The most popular cryptocurrencies are those which are both functional and easy to manage.
Therefore, the only requirements for creating a new cryptocurrency are know-how, an investment of time, and a desire to create something that people will want to own and use. Here’s how the process works.
How to Create a Cryptocurrency
- Determine the use for your cryptocurrency.
- Select a blockchain platform.
- Prepare the nodes.
- Choose a blockchain architecture.
- Establish APIs.
- Create a suitable interface.
- Understand the legal considerations.
1. Determine the Use for Your Cryptocurrency
The first step in creating a cryptocurrency is obvious but essential: Developers (the term used for cryptocurrency creators) must find a compelling use for their proposed digital currency. Traditional and cryptocurrencies can serve many purposes:
What Can You Use Cryptocurrency For?
- Transfer of money
- Alternative wealth storage
- Smart contract support
- Data verification
- Smart asset management
Wise developers define attractive uses for their currencies before launching them on the digital currency markets. Dogecoin, for example, was a cryptocurrency that was created based on a meme that was popular at the time; IMPT is a new token that rewards users that want to reduce their carbon footprints to better help the planet.
2. Select a Blockchain Platform
All cryptocurrencies are anchored by a blockchain platform. This ensures that every transaction is recorded and distributed across the blockchain, creating a system of accountability. This approach makes it impossible for outside parties to hack, trick, or change the digital ledger.
Platforms vary depending on the consensus mechanism used. At its core, a blockchain is a kind of digital ledger that permanently lists every cryptocurrency transaction. However: not all transactions are considered. Some, for example, might be fraudulent. Therefore, a screening process is required. In the world of blockchains, that’s what a consensus mechanism provides.
A consensus mechanism is, in simple terms, a communications protocol that determines if a blockchain network will consider a specific transaction. There are multiple consensus mechanisms available, including:
4 Cryptocurrency Consensus Mechanisms
- Proof of Work. Miners solve complex math puzzles to create a block. Miners who finish the block creation process are rewarded in cryptocurrency.
- Proof of Stake. Miners work together to create each block, with a random miner receiving the reward. Miners must prove they own a sizeable stake in the currency they are mining.
- Delegated Proof of Stake. This measure is similar to proof of stake, but, after staking their crypto coins, users vote for specific miners who create blocks and get the reward.
- Proof of Elapsed Time. The reward goes to the miner who has spent the longest time verifying transactions.
6 Popular Blockchain Platforms
- BitShares 2.0
- Hyperledger Sawtooth
3. Prepare the Nodes
Once you’ve selected a blockchain, the nodes that work in the blockchain must be created. Nodes are, usually, fast computers that connect to a blockchain network to verify and process transactions. Nodes keep the currency running while recording and sharing the data that eventually gets added to the digital ledger.
There are four key considerations when setting up nodes:
- Determining who has access to nodes. Some ledgers are publicly accessible; others remain private.
- Determining where nodes are hosted. A cloud network can host a node, but local nodes may be preferred in order to provide on-premise support for computers that act as nodes.
- Choosing which operating system is ideal. An open-source operating system like Ubuntu or Fedora is usually preferred, as developers can reconfigure the OS to their cryptocurrencies’ unique needs.
- Deciding what hardware is required. Components like processors, RAM, GPUs, and hard drives are important considerations because nodes require faster hardware so that they can process more transactions in less time.
4. Choose a Blockchain Architecture
When it comes to sharing data, blockchains don’t all operate the same way. Digital architecture is a lot like building architecture: It must not only consider design but also how everything fits together to work best. Consider these three prominent blockchain architecture formats:
3 Blockchain Architecture Formats
- Centralized — One central node on the blockchain receives information from multiple other nodes.
- Decentralized — Nodes on the blockchain share data together.
- Distributed — The blockchain ledger moves between nodes. A publically distributed ledger system allows users to review the content; a privately distributed system lets the users adjust the ledger data.
Choosing a blockchain architecture also requires that developers ask themselves the following questions:
- What will the blockchain address look like?
- Who can access blockchain data and who can complete and validate transactions?
- What are the formats for the keys necessary to create signatures for transactions?
- What are the rules for creating assets?
- What are the block size limits?
- Are there any transaction limits?
- How big are the rewards for mining?
- How do nodes identify themselves (also called hand-shaking) when communicating?
5. Establish APIs
The application programming interface (or API) is an interface linking to a blockchain node or a client network. For example, an API can interface between the currency exchange and an application that collects data about that currency. APIs can work for many purposes in the world of cryptocurrencies, but the most common include trading currencies, providing data security, and obtaining currency analysis.
Developers may find many blockchain API solutions, including Bitcore, Factom, and Infura Ethereum APIs.
Note that outside API developers may be necessary for creating API setups. You can also incorporate multiple APIs for different programming needs such as tracking the price of your cryptocurrency or pulling publically available information off its blockchain.
6. Create a Suitable Interface
Developers who wish to make it easy for others to interact with their cryptocurrency must consider the user interface (UI) and user experience (UX). The easier the UI and UX, the more likely it is that consumers and miners will be able to easily configure their settings and manage their investments. Interfaces require a server and database to work, plus someone should be ready to program a website or program that allows someone to review and configure data.
7. Understand the Legal Considerations
Considering the legal aspects of creating a new currency prior to beginning is both wise and necessary. Developers must:
- Set up a legal entity, such as an LLC or Corporation.
- Acquire a license from their local governments.
- Register with certified groups that are devoted to stopping money laundering and other harmful activities, such as the Financial Crimes Enforcement Network in the United States.
Create Your Own Cryptocurrency
In the end, producing a suitable cryptocurrency that is both viable and trustworthy requires investing both time and work. Having the necessary technologies that provide the most security with the most simple of user interfaces can help make or break any developer’s chances of success.