Simply put, cryptocurrency is a decentralised and encrypted digital currency. It is transferred between peers and confirmed using a public ledger through a process called mining.
If you want to understand how cryptocurrency works, you need to understand the following basic concepts:
The process of confirming transactions and adding them to a public ledger is called mining. For the “miner” to be able to add a transaction to the ledger, a complex computational problem must be solved.
Since mining is open source, anybody can confirm a transaction. The coins are given value through the mining process. This is also known as the proof-of-work system.
Transaction is the term given when there is a transfer of funds from one digital wallet to another. The transaction is submitted to a public ledger where it will await confirmation. During the transaction, an encrypted electronic signature is used. The cryptographic signature will serve as mathematical proof that the transaction came from the wallet’s owner.
All confirmed transactions since the beginning of the cryptocurrency creation is stored in a public ledger. To guarantee record keeping is legitimate, cryptographic techniques are used and the identities of the coin owners are encrypted. The ledger is also designed to ensure the corresponding “digital wallets” can accurately calculate spendable balance.
Certain factors make cryptocurrency different from other financial systems. Some of cryptocurrency’s unique features include:
This means cryptocurrencies are designed and built to ensure they will work well in both small and large scales.
A system of cryptography (otherwise known as encryption) is used so creation of coins is controlled and transactions can be verified.
Many currencies that are in circulation are controlled by a centralised government. This is done so creation can be easily regulated by a third party. Cryptocurrency’s transactions (and creation) are open source.
In addition, it is also controlled by code and is reliant on “peer-to-peer” networks. That being said, it’s safe to assume no single entity can affect cryptocurrency.
The proof-of-work system is used by most cryptocurrencies. The scheme makes use of a hard-to-compute (but easy to verify) computational puzzle so cryptocurrency mining exploitations are limited. Basically, it can be likened to a difficult to solve “captcha” that will entail some serious computing power.
Traditional currency forms are defined by physical objects (for instance, USD exists as paper money. During its early years it was backed by gold) but cryptocurrency is digital. Digital wallets are used to store the digital coins and can be transferred to other digital wallets digitally. No physical representation for cryptocurrency exists.
Cryptocurrency owners store their digital coins in a digital wallet that is encrypted. The identification of the coin holder is not attached to the person’s identity but stored in an encrypted address only the owner has control over.
And since ledgers are open to the public, the connection between the coin owner and their coins is pseudonymous as opposed to anonymous.
In the cryptocurrency world, coins are produced and generated by miners. These miners run programs using specialised hardware that are specifically designed to solve proof-of-work puzzles.
If you are new to cryptocurrency, it’s normal to feel confused and overwhelmed. If anything, you are not alone. However, if you really want to get in the cryptocurrency space even if you don’t fully understand the process yet, make sure you get ICO advisory from the experts in the industry. Fortunately, nowadays, you can always get accurate ICO advisory from seasoned cryptocurrency consulting firms like Kryptoia.