How do cryptocurrencies work?

How do cryptocurrencies work?

Hearing a lot about cryptocurrency lately? Undoubtedly, you have a lot of questions. We have answers!

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Cryptocurrencies are digital currencies. In simple terms, this means that they can be used to buy goods or services based on an online ledger system with very strong cryptography at the back-end ensuring all transactions that take place are safe and secure. Currently, the most popular one is Bitcoin which reached a high of $65,000 in April 2021.

As the world is becoming more “digital” due to the revolution of the Internet, more people are looking to use digital devices to buy and sell different products. Banking, medical, education, stock trading, and so on have become very much digitalized and thus an adaptation of digital currencies does make sense. This is the primary reason why the majority of people are driven to invest in cryptocurrencies.

While there are plenty of benefits behind cryptocurrencies, it is important to understand how they work which will help to make better decisions.

Blockchain: A revolutionary technology

Blockchain is the backbone of all cryptocurrencies. Blockchain is a ledger-led public system that helps to store every transaction that happens within a given blockchain ecosystem. Looking at the importance of Blockchain, Satoshi Nakamoto – the founder of Bitcoin – released a paper in 2008. Satoshi was inspired by what wonders blockchain can do and thus launched Bitcoin as a form of digital currency – the world’s first-ever cryptocurrency.

Usually, whenever there is a currency, banks act as the mediatory party where they ensure each transaction that happens is secure and safely reaches its endpoint (think about how a check works). It also acts as a ledger party where it records how much cash one person has in their account.

Blockchain is replacing this system. It helps to record every transaction that occurs and thus has a clearer view of how much funds a person has and how much they can transfer to purchase a good or service. In many ways, it’s less risky than a check since the transaction is nearly instant whereas a check can always bounce.

The cryptographic code of blockchain is insanely secure because it does not allow the creation of more Bitcoins nor does it allow the ones in circulation to vanish. Along with that, blockchain is safe enough when conducting a transaction to keep bad guys out from making attacks that can take away Bitcoin or any other cryptocurrency one has in their wallet. Bad actors can, however, hack an unsecured wallet or even an exchange.

Use of different codes to enhance authenticity and mining process

With the rising number of cryptocurrencies out in the market, there are plenty of features they offer to make sure each is a bit different from the other and helps to solve the questions which the previous one failed to do so. Proof of Authenticity, Proof of Work, Proof of History, and Proof of Stake are employed by many cryptocurrencies to ensure their coins are safe and secure.

Along with this, each coin is “mined” by a mining system in which digital devices run the calculations that take place. These mining farms are recording and calculating each transaction that happens all around the world. To keep things safer, mining plants are available all around the world, and some of them use renewable resources to keep the mining process ongoing in case there is something that goes wrong with the national grid.

Photo Credit: Ivan Radic, Flickr

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