Lately, cryptocurrency seems to have become the hottest topic and everyone wants to be on-board. But what is cryptocurrency? In simple words, cryptocurrency is a digital currency designed to be used as a medium of exchange. It uses cryptography to secure and verify transactions. This article gives an introduction to cryptocurrency for beginners.
People have tried to create digital currencies before. During the 90s, systems like Flooz, Benz, DigiCash were introduced in the market but failed. They had various reasons for failing such as fraud, financial problems, problems between companies and their employees, etc. All of the above-mentioned systems utilized trusted third party organizations which could not handle it properly thus leading to their downfall.
In 2009, an anonymous programmer or a group of programmers published a paper under the pseudonym “Satoshi Nakamoto”. This paper introduced Bitcoin which was described as a “peer-to-peer electronic cash system”. The system is completely decentralized. This means there are no servers or any central authority controlling transactions.
One of the biggest problems that payment networks have to deal with is double spending, which means spending the same amount twice. Third party payment networks took care of that by keeping a list of all transactions and balances. This also meant that they had all the information of their customers including personal details.
Introduction of cryptocurrency solves the problem by not using a third party. Both the sender and receiver interact directly with each other. This is done with the help of blockchain.
What is Blockchain?
All cryptocurrencies use a Distributed Ledger Technology (DLT). DLTs share databases. All the transactions are recorded in it. Blockchain technology is one of the most used DLT. It was first designed by Satoshi Nakamoto for Bitcoin.
A blockchain is a database for every transaction that has occurred using a particular cryptocurrency. Groups of transactions called blocks are added to the database one after another. They form a linear chain of blocks. Once you add information to the blockchain, it can’t be edited or deleted. It stays on the blockchain and everyone can see it.
The entire database is stored on a network of computers known as nodes. New transactions can only be added to the blockchain if more than half the nodes agree on the block’s validity. This is known as consensus. Blocks are created through a process known as mining.
What is Cryptocurrency Mining?
It involves mining the currency in the digital world. Let us take an example of Bitcoin mining.
“A” owes “B” 10 BTC. “A” makes a transaction of 10 BTC to “B”. Miners take this transaction information and encrypt it. More transactions are added until it is big enough to form a block. However, you can’t simply add blocks to the blockchain. The miners have to compute the correct block hash which will be accepted in the chain. They compete with each other to guess the correct code first. Once the hash is calculated, all the other nodes verify its value. If the majority of the nodes agree that it is correct, then the block gets added to the blockchain. The calculation requires a lot of computing power. The miner who succeeds in adding a block is rewarded 12.5 BTC as well as the transaction fees. Each block transaction takes around 10 minutes.
The reason this technology is secure is due to its distributed nature and blockchain technology. Each block is connected to the one before it. If you try to alter one block, you will need to alter all the following blocks. You will also need to calculate the correct hash for the next block to be added to the blockchain. Simply put, you will need more computational power than all the other miners combined. That is nearly impossible.
You can’t handle cryptocurrency the same way as you do fiat currencies. You need a wallet where you can store them. A wallet is nothing but a pair of public key and private key. The public key is used to recognize a user. Private keys are like passwords for your crypto wallets. They must be confidential. If a hacker gains access to it, they can open your crypto wallet and steal your money.
Crypto wallets are available in online, offline, software, hardware or even paper format. You can download them for free. There are paid options also available. Keep multiple wallets if you are planning on storing cryptocurrencies.
There are various cryptocurrencies in the market today. Some of them are listed below.
The first successful application of cryptocurrency. As of today, its valuation is at the top of all cryptocurrencies.
This currency is a lot like Bitcoin but the transactions are much faster.
This uses more advanced technology than Bitcoin. It allows users to develop their own decentralized apps on its blockchain. This is not just a cryptocurrency. It’s a lot more. In terms of market cap, this cryptocurrency is second only to Bitcoin.
Ripple, IOTA, Bitcoin Cash, etc. are some other cryptocurrencies in use today. You can also make your own cryptocurrency if you want!
Cryptocurrency is a virtual currency that can be used online. It does not exist physically but it has some value. The market of cryptocurrency is volatile. Its price keeps fluctuating a lot. At the time of writing this article, the price of one Bitcoin is equivalent to $4029.23.
Moreover, mining cryptocurrency is pretty expensive. You need special hardware for it and ASIC chips which can process computations faster. Also, the equipment needs a large amount of storage space. You need to prevent the hardware from overheating. This requires extra cooling equipment.
If you are planning on investing in cryptocurrency, make sure you are well informed about it. You should only invest through trusted sources.