Basics concepts of Cryptocurrency
Basics of Cryptocurrency is what everyone desires to know and understand these days. What is cryptocurrency? How cryptocurrency works? These are some of the ubiquitous queries we will try and answer in this article. This is the first of many series of educational articles on cryptocurrencies.
What is Cryptocurrency?
Generally speaking, a cryptocurrency is an alternative currency which is virtual in its nature and can be used for transactions while buying and selling goods and services just like traditional currency. As compared to traditional currency which need a centralized bank or a regulatory authority to control the transaction, cryptocurrencies make it easier for anyone to transfer funds between to transactional parties, by using public and private keys for the purpose of security. Without any centralized authority to control these transactions, there are no steep processing fees that a user needs to pay while performing transactions through cryptocurrencies.
Difference between cryptocurrency and normal currency.
Normal or 'fiat' currencies, which are controlled and regulated by the central banks of the respective country by printing money, which ultimately determines its value. In comparison to this, the cryptocurrencies are not controlled by any country or any banks, instead their value is only dependent on the supply and demand forces of the cryptocurrency in circulation.
Apart from the above mentioned difference between cryptocurrencies and normal currencies, the other major difference between the two is that there is a limit on how much of a cryptocurrency can be circulated In the market, such as Bitcoin which has a limit of 21 million of itself to be ever produced and its quantity in circulation will eventually decrease.
This means that there is never a chance of inflation in the case of cryptocurrencies, whereas in the case of normal or 'fiat' currencies surplus printing of money will produce inflation for sure, thus reducing the value of the currency.
How cryptocurrencies work?
Before we start understanding how cryptocurrencies work, let us understand a few basic concepts given below:
- Public ledgers: All transactions which are confirmed right from the starting of a cryptocurrency are stored in a public ledger. The coin owners are identified with the help of an encrypted key. The coin owners using "digital wallets" can use this ledger to calculate an exact and accurate spendable balance. The most famous cryptocurrencies, Bitcoin calls such a ledger "transactional blockchains". A blockchain is a public ledger which contains all records of all Bitcoin transactions. New transactions, as and when they occur are added as "blocks" of transactions to the blockchain.
- Transactions: Transaction is defined as a transfer of funds between two digital wallets. This transaction gets added to a public ledger, as described above, awaiting confirmation. The owner of the transaction is identified using an electronic encrypted signature or cryptographic signature.
- Mining: In terms of Bitcoin, mining is an integral part of how Bitcoin works. When the transactions are added to the public ledger (blockchain in case a Bitcoin), new coins are created (mined). To add a transaction to the public ledger, the miner must solve a complex computational problem like a mathematical puzzle. Miner can be anyone, as it is an open source system. The "miner" who is first to solve the mathematical puzzle gets to add a block of transaction to the ledger. Once the block is added to the ledger, a small transaction fee is added to the miner's wallet (along with the newly created coins).
Let us look at mining in detail from the perspective of Bitcoin. It is a process by which miners compete with each other to discover new Bitcoins and add these recent transactions to the public ledger or transactional blockchain. Thus, mining is the process of adding recent transactions to the public ledger, and thereby making them a permanent part of the bitcoin transactional block chain.
In order to make sure that no miner is able to simply create a transaction block and immediately add it to the block chain, the Bitcoin algorithm is designed to make mining difficult. Instead of simply being able to add a transaction block to the transactional block chain at his whim, a miner is required to solver a very difficult mathematical puzzle, as described above. This is called proof-of-work scheme, which was designed to have solutions which are easy to verify but very difficult to find.
Simply understanding, miners are competing with each other to solve the difficult mathematical first. As soon as a miner is able to solve this cryptographic puzzle first, he/she will broadcast the solution to all the other miners. The other miners verify the solution to be correct and if found to be correct, the successfully mined block is permanently added to the transactional block chain.
Advantages of cryptocurrencies.
- You are able to access your money anytime and anywhere.
- There is no effect of inflation and deflation.
- There are no bank holidays.
- Personal information is highly secure in cryptocurrencies.