In this 21st century almost everyone heard some good and bad about the cryptocurrency or Bitcoin, Ethereum, Dogecoin, or Shiba Inu. If you do not hear these names then it is the most shocking to me. Apart from the good and bad about cryptocurrency, we will see “What is cryptocurrency? & How cryptocurrency works?”
So let's dive in-
What is cryptocurrency?
In a very simple term, a cryptocurrency is a decentralized digital or virtual currency that can be utilized to pay in exchange for goods and services. Cryptocurrencies are developed by using cryptography or cryptology which makes them secure and nearly impossible to counterfeit. The word “Crypto” from cryptocurrency itself is derived from the encryption techniques which is used to secure the network. Cryptocurrencies are distinguished by the fact that they are not issued by any central authority, which therefore protects them against government intervention or manipulation. The First cryptocurrency is Bitcoin introduced by Satoshi Nakamoto in 2009. There are nearly 15000 cryptocurrencies circulating according to CoinMarketCap. **
Now we know what is cryptocurrency? It is obvious to think that ‘How cryptocurrency works?’
How does cryptocurrency work?
Cryptocurrency works more similar to PayPal, or a Credit Card as a substitute for the rupee, dollar or euro, we trade digital assets for products and services. To perform a transaction in cryptocurrency, we must exchange currency with a peer using a cryptocurrency wallet (e.i. Trust Wallet, Meta Mask, Binance, etc.), which is a digital wallet. These wallets help us to transfer money from one account to another as we do in Paytm or Google Pay. To access the wallet, we need a password also known as a private key to execute a transaction. All the transactions are recorded on a public ledger which displays transactions without exposing the people involved identities. All these actions are based on blockchain, in a simpler way cryptocurrencies work using a technology called the blockchain.
To understand ‘How cryptocurrency works?’ in a better way we have to understand ‘What is blockchain?’
What is blockchain? & How does blockchain works?
A distributed ledger is what a blockchain is. DLT (distributed ledger technology) allows data to be stored on several computers, called "nodes." A node may be any blockchain user, but it requires a lot of computer energy to drive. Inside this ledger, nodes evaluate, verify, and store data. Keeping data in the blockchain is totally different from traditional data-keeping systems which store data in a central location, such as a computer server.
The information transferred to the ledger is organised into blocks, or groupings of data, by a blockchain. Each block may only hold a certain amount of data, and new blocks are added to the ledger on a regular basis, forming a chain.
Every block has its own cryptographic "hash" that provides a unique identification. The hash not only protects the information within the block from anybody who does not have the requisite code, but it also secures the block's position in the chain by identifying the block preceding it.
Information is permanent and immutable once it is recorded to the blockchain and encrypted with a hash. Every node keeps track of the whole history of data on the blockchain, all the way back to the beginning. It wouldn't affect the information saved by other nodes if anybody altered with or hacked into one computer and changed the data for personal advantage. Because it differs from the majority, the changed record can be easily identified and fixed.
Now we know ‘what is cryptocurrency?’, ‘how cryptocurrency works?’, ‘what is blockchain?’ and ‘how blockchain works?’. In the next article, we dive deeper and we will understand the ‘advantages and disadvantages of cryptocurrency’.
** Data recorded by CoinMarketCap on dated December 2021
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