You have probably heard of many terms used to describe cryptocurrency basics and the blockchain. These include digital money, digital wallets, electronic wallets and other such terms. Most information circulating about cryptocurrency makes it sound too difficult to understand or even try out. One of these might be the term blockchain. Let’s try to understand more about this new way of transacting online.
What is Cryptocurrency?
Cryptocurrency is digital money. Being purely Internet-based, there are no physical coins or bills to represent it. Valuable assets are not tied to them in the real world. Cryptocurrency is not like stocks, bonds, precious metals, artwork, or real estate. Being possessed or owned by an individual is its only use and value. This is why its value fluctuate erratically.
Cryptocurrency is not controlled by a central authority. This means that it is decentralized. This makes it theoretically unaffected by government control and interference.
How it All Started
Satoshi Nakamoto is the unknown inventor of Bitcoin. Bitcoin is the first and still the most important cryptocurrency today. Cryptocurrencies came about as a side product of this invention. Satoshi announced in 2008 that he developed “a-peer-to-peer electronic cash system”. The network prevents double spending of cryptocurrency. This network is decentralized, with no server or central authority that controls it.
There needs to be a payment network with accounts, balances and transactions to make digital cash work. The main issue it faces is how to prevent one individual from spending the same amount twice or double spending. A central server usually does the record keeping. This central server is the central authority that manages the network.
In a decentralized network, you don’t have a central server. Every single entity of the network does the job of record keeping. This is the blockchain. In the blockchain, every peer in the network has a complete history of all the transactions. The peers check if future transactions are valid and invalidate attempts to double spend.
Cryptography is a method of disguising and revealing information. It is a core part of cryptocurrency transactions. It ensures the security of a user’s information and the safety of transactions.
Individuals conduct transactions by sharing public passwords. Encrypted information result in cryptographic codes or keys which make up a password. A public password has an encrypted digital wallet attached to it. A digital wallet has a private password that only the wallet owner has access to. Each public password references a block of transactions on a digital ledger called a blockchain. Transfers involve minimal processing fees.
The blockchain is a digital ledger that records all transactions on the network. All the peers in the network (P2P) get a broadcast of the requested transaction. The network consists of computers known as nodes. The P2P network of nodes validates the transaction and the user’s information thru known algorithms.
A verified transaction is recorded with other transactions. This create a new block of data for the ledger or blockchain. This new block is added to the existing blockchain. This complete the transaction.
A verified transaction records cryptocurrency, contracts and other information. Transactions recorded in the blockchain becomes permanent and unalterable.
The whole P2P network receives transaction request almost immediately. It takes some time to confirm transactions. The status of an unconfirmed transaction remains pending and it can be forged. Confirming a transaction sets it in stone. It is no longer forgeable, it is irreversible and becomes part of the blockchain.
Miners have the job of confirming transactions in the network. They process transactions, validate them and broadcast them on the network. After a miner confirms a transaction, every node has to add it to its database of records. Miners have to put in work thru their computers to do their task. As a reward for doing their job, they receive a token of cryptocurrency.
Hopefully, this helps you understand a bit more about cryptocurrencies, the blockchain, and how they work. They will become an important part of your online shopping experience. Cryptocurrency is a new way to invest and grow your money. Learning and understanding new financial technologies should be part of your continuing education to improve your financial literacy.
Featured Image: Original Photo by Dmitry Demidko on Unsplash.