Crypt-o-currency…This sounds like the currency they may have used on Superman’s home planet, Krypton. Here on earth Cryptocurrency means something completely different.
Cryptocurrency is still alien to most people, but not to all. This may still be very geeky, but many people, banks, and even companies are starting to see how important Cryptocurrency will become in today’s society.
Before I start explaining how Cryptocurrency works, you have to understand exactly what it is.
What is Cryptocurrency?
Cryptocurrency can be described as a “wonder-blunder”. The inventor of Bitcoin, Satoshi Nakamoto, never intended to create cryptocurrency; this was a side product of a completely different product. What Satoshi Nakamoto created was something many people tried to create back in the nineties, but evidently, they all failed.
Cryptocurrency can also be explained as digital money. Cryptocurrency is a database, with limited entries that no one can change, not without fulfilling the proper and very specific conditions. An easier way of looking at is by visualizing it as a database where a digital currency is transferred between peers and monitored by mining.
• Mining is the process where transactions are added to a ledger and made public.
This is a much more secure way of transferring money. The value of cryptocurrency is very flexible and is determined by supply and demand. The seller and buyer agree on a fair price based on the current value of cryptocurrency elsewhere.
The most common and first cryptocurrency is Bitcoin.
How Does Cryptocurrency Work?
First, you need to understand what you will need to be able to use cryptocurrency.
When buying or receiving cryptocurrency, you are given a digital key to the address of that currency. This digital key is also known as your digital signature, as this key is unique to you. You can use this key to validate, access and approve different transactions.
You will have two signatures, a public and a private signature (key). Your private signature is known only to you. This is the equivalent of your ATM pin, just much longer and complicated. Your public signature will be used to verify if a transaction was really made by you.
• Choose Your Wallet :
You will need a safe place to keep your key. This is where cryptocurrency wallets come in.
This is not a leather wallet you bought at the boutique on the corner of whatever street; this is a digital wallet so unfortunately, you will not be able to see it in another colour. You do, however, have a range of options to choose from:
1. Paper wallets: some websites will create a page with two codes on it. One will be your private code, and the other will be your public code.
2. Hardware wallets:
You can use a USB device specifically for storing your cryptocurrency and your private access keys.
There are much more to choose from; these are just a taste of all the possibilities that await you.
Now for how cryptocurrency actually works:
Cryptocurrency runs on blockchains. These are ledgers that are duplicated across a network of computers. The updated document is then made public to all cryptocurrency holders. These blockchains are run by miners. They make use of powerful computers to tally all transactions and validate these transactions. They ascertain that transactions are processed securely and safely. Since no banks are involved the fees associated with banking, are eliminated.
The identity of the buyer and seller are kept secret. However, all transactions are made known to everybody in the blockchain network.
Mining has two main functions
1. Adding new transactions to the blockchain, processing, verifying and securing transactions.
2. Adding a new currency.
Mining requires a very strong computer and a special program to compete with its peers to complete these blocks, by using complicated mathematical equations. Miners would attempt to solve the equations by using cryptographic hash functions. This is the use of specific length numerical values that identify data. The first to crack the block is considered the one who mined the block and is eligible for a reward.
The above is a lot of information to process, and you might be feeling like you are even more lost than before.
Cryptocurrency is a database where peers can transfer digital currency without adding additional fees. It is maintained by miners who record all transactions, add it to blockchain, and once these blocks have been solved, it is released to all cryptocurrency holders.