Among the numerous innovations created each day, cryptocurrency is one of the world’s newest inventions that continues to fascinate the public to this day. As with all things new and advanced, people are taking their time to get to know about it.
While some are intimidated and tend to shy away from learning about this world-changing technology, others are intrigued enough to know how the mechanism works. If you want to learn more about cryptocurrency or understand its basic concepts, then you’ve come to the right place.
In this section, you’ll learn all about the intricacies of cryptocurrencies and what makes them work. Why are cryptocurrency and the technology surrounding it such revolutionary ideas? How is it changing the world as we know it? Find all the answers to these questions right here.
Explore each section further when you check out their respective articles that explore each concept with more depth and detail. Everything you need to know about this world-changing technology, from cryptocurrency news to updates, you will find them right here.
What is cryptocurrency
Before diving into the topic, let’s get down to the basics first. Cryptocurrencies are digital currencies that can be transferred from one point to another through a network on the internet. It’s also given to miners as a reward for validating transactions and securing the safety of the network for their respective coins.
In a nutshell, a cryptocurrency is a peer-to-peer electronic cash system that lets you send money online without the need for intermediaries which cut down cost and processing time. They do not have a physical form and are only represented by strings of letters and numbers that can be accessed when you’re sending or receiving them.
Instead of banks and financial institutions serving as the middleman, thousands of members on the network validate the legitimacy of each transaction. Afterwards, the records are kept on an open-source public ledger called the blockchain.
Traditional vs revolutionary
In the traditional monetary system, records are kept from the general public and banks are the only ones allowed to see them. Banks are trusted to be true to their word and that no foul play will happen.
Most of the time, the system works and every transaction passes through without fail. However, some issues still arise due to the centralized nature of the bank’s system. One of these issues is the double-spend problem where your money is spent twice on an item or service you only paid for once. This error is due to the bank’s server overlooking the transaction or running it twice because of the surmounting traffic.
Change has come
Since there is only one server in a centralized system, the chances of it being overloaded are higher. When it’s pumped with thousands of requests, the server can overheat and go down, leaving transactions hanging and unprocessed. This is when problems arise. This is usually the time when mobile bank applications cannot be accessed due to complications with their server.
Cryptocurrency resolves this problem by utilizing not just one server for the system, but thousands of computer nodes spread throughout the world. This effectively decentralizes the control and power of the network, making sure that all requests are processed in real-time.
Instead of the records being stored in one centralized location, they are kept in the blockchain that is stored in the cloud. This way, not just one server verifies a transaction but any of the thousands of nodes can process and upload the transaction to the network.
Before a transaction is processed, a blockchain miner confirms its legitimacy first by solving a computational problem. A miner’s job is to confirm that the token used in the transaction hasn’t been used anywhere else to prevent double-spending.
The first miner to solve the problem gets to upload the transaction to the network, and as an incentive, they receive a reward in the form of cryptocurrencies. For example, a Bitcoin miner receives 6.25 BTC for every block they add on the blockchain. Considering the price of Bitcoin today, it is a huge reward in exchange for their contribution to the network.
However, cryptocurrencies that utilize a different blockchain aside from Bitcoin’s have their own way of rewarding their miners. Other networks don’t rely on miners to verify every transaction but instead use a model called ‘proof-of-stake’ as opposed to Bitcoin’s ‘proof-of-work’ with the ‘work’ pertaining to mining. Some of these non-mined cryptocurrencies include Ripple, Stellar and Cardano among others.
Once a miner finishes validating a transaction, other nodes in the network have to agree that it is authentic and true. All network participants need to reach a consensus about the authenticity of a transaction otherwise it will be forfeited and will not be uploaded to the network.
In other words, if any of the miners found the transaction faulty, it won’t pass through and no crypto coin will be transferred. Additionally, it has to be verified by all the other nodes in the network. The blockchain’s consensus mechanism is a fool-proof system that serves as the network’s security feature. Unless all participants reach a consensus, a transaction will not be verified.
This is how cryptocurrency ensures the legitimacy of its value without needing a central authority such as a bank to validate it.
The blockchain: What it is and how it works
When miners solve a computational problem, they compile a bunch of other previously validated transactions and group them into a block before uploading it into the network. Each block contains the hash of the block that came before it and the next block will contain the hash of the previous block and so on. This effectively ‘chains’ the string of blocks together making them unchangeable and impossible to tamper with.
To make it easier to understand, let’s look closely at a block. A block contains three key items: data, hash and the hash of the previous block. The data are the validated transactions grouped while the hash is the personal identifier for every block. It can be compared to a fingerprint.
A hash contains a unique combination of letters and numbers exclusive to a certain block that is relative to the contents of the said block. If something is changed in the block, the hash will also change accordingly.
You simply cannot alter the data contained in a block because doing so will require changing the hash of the block that came before it and the process only repeats.
This is what makes the blockchain secure and immutable. Altering any data such as the number of Bitcoins sent to an address, for example, will require changing all the hash values of all blocks that came before it which is an impossible task.
Where to buy, store and use cryptocurrency
Now that you know how cryptocurrency works, it’s time to learn how you can get a hold of them. Find out where you can buy cryptocurrencies, how to store them, and where to use them.
Where to buy cryptocurrency
There are three different ways you can buy cryptocurrency: through brokers, exchange platforms, and marketplaces. Each one offers its own way of selling cryptocurrencies and caters to a specific level of user knowledge. When choosing which option to use, you need to consider the site’s additional fees, level of accessibility, and ease of use.
Here’s the basic breakdown of the three sites:
- Brokers – Directly sell cryptocurrency; faster and easier process but have a higher fee than exchange sites; perfect for beginners; i.e. Coinbase
- Exchange platform – Automatically matches buyers and sellers to complete transactions; cheap fees; hard to navigate for beginners; recommended for those who already have experience with cryptocurrencies; i.e. Binance
- Marketplace – Buyers and sellers interact with each other to complete trades; low fees because there are no intermediaries; for advanced users; i.e. BisQ
Where to store your digital coins
Even though cryptocurrencies don’t take a physical form, you still need to have a place to store them. If you don’t store them in a secure and private location, your coins are vulnerable to cyberattacks and can be stolen from you any minute. That’s why these coins are stored in cryptocurrency wallets.
There are two types of wallets you can use: hot and cold wallets. Hot wallets are also called software wallets and they keep your coins online, making them more accessible through mobile applications. Though these are usually available for free, hot wallets are less secure since your coins are still online, and therefore, can be hacked.
On the other hand, there are cold wallets that store your coins inside a separate piece of hardware. These are the safest and most secure way to store your coins since they are kept offline. However, this means they are less accessible since you’ll need an additional piece of equipment to access your coins. Additionally, they are also more expensive.
What you can do with cryptocurrency
There are plenty of things you can do with your cryptocurrencies once you’ve purchased and properly stored them. You can use them to purchase things online just like cash and you can invest them. Others use crypto as a medium of exchange in daily transactions while others prefer to leave them in their wallets and wait for their value to appreciate.
With the growing popularity of new technologies around the world, the possibilities for cryptocurrencies keep on growing. There’s no better time to try it out than today! But make sure that you’re well equipped with the right information before making big financial decisions. Fortunately, you can find all information about digital currencies here including cryptocurrency news and updates.