A digital currency is a medium of exchange that is generated, stored and transferred electronically. Digital currencies are not typically associated with any country's government or represented in physical forms like the coins and notes of traditional currencies.
Cryptocurrencies, the most common category of digital currency, are the type that comes to mind for most people when they hear the term. Cryptocurrencies rely on encryption to secure the processes involved in generating units and conducting transactions. They are used similarly to conventional money for purchases online and in person and are accepted by an increasing number of sellers.
The first widely-adopted cryptocurrency, Bitcoin, relies on blockchain's distributed ledger model to prevent a single point of failure and to ensure that the record of transactions is tamper-proof. Most other well-known cryptocurrencies also use blockchain and the technology is being explored in many industries as a secure and cost-effective way to create and manage a distributed database and maintain records for digital transactions of all types.
Virtual currencies, another subset of digital currencies, are mediums of monetary exchange that are confined to particular software-based environments. One of the earliest virtual currencies was the Linden dollar of Second Life.
David Chaum, an American computer scientist and cryptologist, first introduced the idea of digital currencies in his 1983 research paper, "Blind signatures for untraceable payments."