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A complete beginners’ guide on how cryptocurrency works

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Since Bitcoin turned its unaware holders into instant millionaires, cryptocurrency has caught the attention of many people. As of June 2020, there are a total of 2,677 crypto tokens and altcoins circulating in the market.

More and more people are investing in it as a mode of payment, financial asset, and in other ventures. Digital assets are steadily making a move to mainstream finance but not a lot of its buyers and sellers completely know how cryptocurrency works.

Be a more informed crypto user by learning and understanding the ins and outs of digital assets. Check out how cryptocurrency works and other related details here at BTC Post!

Crypto background: What is crypto?

A cryptocurrency is a new form of virtual asset secured by cryptography. It makes use of algorithms and encryption techniques such as elliptical curve encryption, public-private key pairs, and hashing functions. These make crypto close to impossible to counterfeit or even double-spend.

It was in 1983 when American cryptographer David Chaum formed the idea of anonymous cryptographic electronic money. It was called ecash until Chaum made an early form of cryptographic electronic payments named Digicash in 1995.

In 1998, Wei Dai released a report on ‘b-money’, describing it as an anonymous, distributed electronic cash system. Later on, bit gold was explained by computer scientist Nick Szabo as an e-money system which needs users to complete a ‘proof of work’ function with solutions being cryptographically put together and published.

Bitcoin is the first decentralized crypto created in 2009 by a mysterious developer known as Satoshi Nakamoto. Since then, there are many crypto tokens and altcoins that are released in the market.

Most of the cryptocurrencies circulating in the market are decentralized networks powered by blockchain technology. Blockchain is a public ledger enforced by a peer-to-peer network of computers to record all of the transactions in crypto. This database ensures the integrity of transactional data stored in blocks that are then chained together in chronological order.

As a system, crypto allows users to have secure payments on the internet. These transactions are denominated in terms of virtual tokens represented by ledger entries that are internal to the system.

How does crypto work?

Crypto is recorded in a public ledger of accounts and transactions between peers using a system of verification and encryption. Crypto transactions are made by sharing public keys that are linked to a private and encrypted digital wallet.

The person who makes the transaction uses the crypto wallet to transfer funds from one public address to another. Whenever a transaction is made, the sender and the receiver each use a unique digital signature that includes a public key and a private key.

A public key is used to create a signature so a user can send money to someone else. On the other hand, a private key is used by others to verify this signature to legitimize the deal. This feature helps ensure each transaction is correctly recorded and that the sender owns the asset they are trying to transfer.

Moreover, time-stamping helps make sure that the order of transactions made with a crypto coin is arranged in progressive order. To do so, a group of crypto transactions are placed in a ‘block’ that is linked to the coin’s ledger. Once the block is confirmed, it is permanently and publicly accessible for other users to view.

Its decentralized nature means that it is controlled by users and computer algorithms unlike credit and debit accounts managed by a central bank or government.

Types of crypto you can use

There are many types of cryptocurrencies for different kinds of functions. Be that as it may, each virtual asset is supported by a decentralized peer-to-peer computer network. Here are some of the most popular options for traders and investors:

Payment crypto

Payment cryptocurrencies are a form of digital money run by a distributed network of computers managing a shared blockchain software. As the name implies, most payment crypto coins focus on settling accounts for a certain use case or industry. However, there are others that try to compete with fiat money.

Some of the common crypto coins for payment purposes are:

  • Bitcoin (BTC)
  • Litecoin (LTC)
  • Ripple (XRP).

Infrastructure crypto

Infrastructure crypto is mostly used to pay the computers that are behind the running programs on a shared blockchain software network. Crypto coins for the purpose of interoperability can also be labelled as infrastructure crypto.

Its goal is to supply a means to link multiple blockchains together. It also allows crypto users to transact across many computer networks. An example of an infrastructure crypto coin is Ether (ETH). This is because users need to purchase it to create and use decentralized apps (dApps) running on the Ethereum network.

Financial crypto

Financial crypto is a digital asset that helps users manage or exchange other crypto tokens and/or altcoins. Its purpose includes helping a user trade on a decentralized exchange site or giving a review on how it should be operated.

Moreover, it can also be used for crowdfunding other assets. This gives way for early-stage crypto projects to be connected to potential investors. More complex financial crypto coins may even try to imitate the financial services of the mainstream finance sector such as market making or lending and borrowing.

Service crypto

Service crypto has the means to help financial products access and vet external data sources based on the blockchain tech. It can offer tools for managing personal or enterprise data on the blockchain.

Moreover, it can give users virtual identities and link a user’s records from the real world to the blockchain. This means that it can provide real-world applications for many industries. An example of service crypto for the healthcare sector is Dentacoin. Meanwhile, Storj and Siacoin are service crypto coins that offer file storage services.

Learn more about blockchain tech and how cryptocurrency works here at BTC Post. You won’t miss out the latest crypto news and updates here!

Cryptocurrency Market Capitalization
  • bitcoinBitcoin (BTC) $ 63,143.00 5.18%
  • ethereumEthereum (ETH) $ 4,078.86 0.18%
  • binance-coinBinance Coin (BNB) $ 472.09 6.17%
  • tetherTether (USDT) $ 0.997385 0.55%
  • cardanoCardano (ADA) $ 2.17 1.3%
  • solanaSolana (SOL) $ 182.56 6.36%
  • xrpXRP (XRP) $ 1.11 3.35%
  • polkadotPolkadot (DOT) $ 42.99 3.42%
  • usd-coinUSD Coin (USDC) $ 0.999730 0.35%
  • dogecoinDogecoin (DOGE) $ 0.244166 4.01%

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