In this article, we are going to review and explain the key aspects of cryptocurrency. What is it? Is it the money of the future or a regular financial trick? After you read the text below, you will know everything you need about this technology.
Today, ‘cryptocurrency’ is a term familiar to all people, who have access to the Internet. Of course, most common users perceive digital currency as a geeky phenomenon and choose to stay away from it. However, advanced users, as well as banks, governments and financial structures are aware of its potential and importance.
Since 2016, all prominent publishers research the idea of digital currency, blockchain, and mining. However, beyond the buzz, most people have narrow knowledge about it and mostly fail to understand the basics.
Therefore, we have decided to talk about cryptocurrencies seriously and give answers to the most important questions. What is digital currency? Why should you be aware about it? And what you need to know? Let’s start.
What is cryptocurrency and how it emerged?
It is not a widely-known fact, but cryptocurrency appeared as a side product of another project. An unknown founder of bitcoin, Satoshi Nakamoto, didn’t actually invent cryptocurrency. Instead, his great invention was a decentralized financial system. There were many attempts to create digital before, but they were not successful.
Nakamoto’s invention is associated with a decentralized peer-to-peer network that prevents double-spending and uses cryptography to protect itself from any outside interference. It doesn’t have any single authority and therefore is absolutely independent from government, banks and other regulators. A decision to create a network of that kind gave birth to bitcoin, the first and the most popular digital currency.
The principle that prevents double spending keeps digital cash from being used more than once. In global financial system, this is done by a server that records all transactions and balance data. As for the decentralized currency, you cannot have such server a-priory. Therefore, every entity of the network has to do this on its own. Peers inside the network have transaction lists and check if the operations are valid every time they are made.
It means that even if there is a smallest disagreement about a single operation, than the entire system cannot function properly. You must be wondering, how do these peers keep agreement about the records? In traditional systems, again, there is a central server that decides if the agreement is achieved. So how can you reach it without having such an authority?
In fact, nobody knew how to do this before Mr. Satoshi appeared. Actually, nobody even believed that this is possible. However, Satoshi proved that it was. He aimed to achieve the technology that operates without an authority and he did it. By the way, his brilliant ideas are widely applied to other sphere of life today. For instance, businesses and other huge networks have borrowed the decentralization principles from bitcoin and now use them successfully for their aims. So, let’s take a closer look at this awesome mechanism.
The coins creation and the transaction principle
As we have already said, a cryptocurrency network consists of peers. Every peer keeps a complete history of all transactions ever made as well as the information about the balance of every member’s account.
In simple words, every transaction has information about the bitcoins’ way, like “John sends one bitcoin to Sarah”. Every transaction is signed by a sender’s private signature. The signature is nothing special, just a cryptographic key. After this, a transaction is published in a network and sent from one person to another. This is actually the way peer-to-peer technology functions.
The entire network knows about a transaction right at the moment it is done. However, it needs some time to get confirmed by all members. Confirmation is an important aspect of digital currency. Maybe, it is the most important one, since cryptocurrency is all about confirmation. The information about this act is stored in a public register known as blockchain.
Transactions receive confirmation from miners. They review transactions and mark them as legit if everything is alright. After that, they are spread in the network and added to the blockchain. From that moment, they become public and cannot be disputed anymore. To do the job, miners have to solve complicated mathematical problems. They get rewarded with coins for this activity.
Miners: what are they actually doing?
Every person can become a miner, because bitcoin’s system is absolutely open. However, due to decentralization, the network needs a mechanism that will prevent it from any attempts of abuse. To make the system protect itself, Satoshi Nakamoto set one important rule for miners: each of them has to do some work to produce hash (a product of cryptographic function) and connect blocks together. This principle is known as proof-of-work.
You don’t have to understand the details of this principle. All you need to know is that every computer completes a certain task to build a new block in a chain. A successful solution brings bitcoins to a member. This is how bitcoins appear. The mathematical puzzles become more and more difficult and require significant computing powers from a miner. This way, a specific amount of currency can be created in a particular time period.
Bitcoin’s revolutionary features
Bitcoin offers an absolutely unique and revolutionary financial system. It’s decentralization ensures consensus about balances and transactions, making cryptocurrency independent and transparent. Moreover, system’s safety and functioning is provided by the system itself, and nobody can interfere and change it manually. Isn’t it a perfect technology for financial operations of all kinds?