What is CryptoCurrency?
When we buy or sell things, the payment is usually processed by a bank or credit card company. Problem number one is that companies often take a cut of the transaction. Two, we must trust these companies to protect our sensitive data from hackers. Three, most international payments take a long time and are expensive. To solve these problems, we could use a particular currency that is secure and based on science of cryptography, which is a way of protecting information using mathematics.
This particular type of currency is called a cryptocurrency (Crypto) and only exists in computer networks. When you send someone this currency, the money goes directly to them, removing the middleman. At the same time, the transaction is broadcast to the entire network and recorded in a permanent way, which means it’s almost impossible to fool the system. Lower cost, transactions are faster, especially across countries and even those people around the globe who don’t have bank accounts can buy or sell goods and participate in the global economy. However, there are some risks.
The transactions in most cryptocurrencies are anonymous. Some cryptocurrencies can even be untraceable. This can make it easier for the bad guys to make payments without being noticed. If you lose your password, you could lose all your money. At the moment, cryptocurrencies are highly volatile.
They can’t process large amounts of transactions quickly yet and they’re not even widely accepted. But if we can counter the risk, then this new technology or some variation of it can completely change the way we sell, buy, save, invest and pay our bills. And who knows? This could be the next step in the evolution of money.
In Technical Terms
Today, cryptocurrencies have become a global phenomenon, known by most people but understood by few. In 2018, you’ll have a hard time finding a major bank, accounting firm, the software company, or government that hasn’t researched cryptocurrencies or started a blockchain project. Beyond the noise in press releases, many people often fail to unlock and understand the basic concepts. So let’s walk through the whole story. What are cryptocurrencies?
Satoshi invented Bitcoin in 2008 as a Peer To Peer electronic cash system. To realize digital cash, you need a payment network with accounts, balances, and transactions. That’s easy to understand. One major problem every payment network has to solve is to prevent double-spending. That is, to prevent one entity from spending the same amount twice.
Usually, this is done by a central server that keeps records of all the balances. In a decentralized network, you don’t have this server, so you need every single entity of the network to do this job. Every peer in the network needs to have a full list of all the transactions to check if future transactions are valid or an attempt to double-spend. But how can these entities keep a consensus about these records? If the peers on the network disagree about one single minor balance, everything breaks.
They need an absolute consensus. Nobody knew how to achieve this until Satoshi proved it was possible. Cryptocurrencies are a key part of the solution. To illustrate this, we look at the transactions on the network. A transaction is a file that says Bob gives x bitcoin to Alice and is signed digitally by Bob.
Once signed, the transaction is broadcasted to the network, and sent from one peer to every other peer. This is standard P. Two P technology. Nothing special happening here. After a specific amount of time, the transaction gets confirmed.
Only miners can confirm transactions. This is their job in a cryptocurrency network. They take transactions, stamp them as legitimate, and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has to become part of the blockchain.
For this job, the miners are rewarded with cryptocurrency. For example, bitcoins. Anybody can be a minor. They just need to use some of their computer’s power to qualify for the task. Every miner competes to solve a cryptographic puzzle.
After finding a solution, a miner can confirm the transaction and add it to the blockchain. As an incentive to do this, they then receive a payment from the network in the form of a cryptocurrency. In this way, a network of independent actors is economically incentivized to maintain the legitimacy of the transaction history. So that’s the gist of it. Cryptocurrencies are the key to the complex digital caste problem that Satoshi solved how to maintain integrity and consensus across independent and potentially malicious actors.
Cryptocurrencies are essentially the monetary incentive offered to anyone willing to keep the network secure.