Cryptocurrency is an encrypted and decentralized digital currency that is transferred between friends and confirmed in a general ledger through a process known as mining. Below is a simple explanation of how cryptocurrency like Bitcoin works. The explanation starts from the basics of cryptocurrency to a more in-depth review of other properties that have made cryptocurrency the way it is today.
To understand how cryptocurrency works, we need to learn some basic concepts, about public ledger, transaction, and mining
1 Public Ledgers.
All transactions confirmed from the start of the creation of cryptocurrency are stored in a general ledger. The identity of the owner of the coin is encrypted and the system uses other cryptographic techniques to ensure the validity of the record. Ledger ensures that the corresponding digital wallet (wallet) can calculate the balance that can be spent accurately. Also, new transactions can be checked to ensure that each transaction uses only the coins that the user currently has. Bitcoin calls this general ledger a “transaction block chain”.
Transfers of funds between two digital wallets are called transactions. The transaction is submitted to the general ledger and waits for confirmation. The wallet uses an encrypted electronic signature when the transaction is made. A signature is a part of encrypted data called a cryptographic signature and provides mathematical proof that the transaction is from the owner of the wallet. The confirmation process requires a little time (ten minutes for Bitcoin). Mining confirms the transaction and adds it to the general ledger.
Mining is the process of confirming a transaction and adding it to a general ledger. To add transactions to the ledger, “miners” must solve computational problems that are increasingly complicated (such as mathematical puzzles). Mining is an open source so anyone can confirm the transaction. The first “miner” in solving puzzles can add “blocks” of transactions to the ledger. The way in which transactions, blocks, and general blockchain ledgers work together ensures that no one can easily add or change blocks arbitrarily. After the block is added to the ledger, all related transactions are permanent, and they add a small transaction fee to the miner’s wallet (along with newly created coins). The mining process is about everything that gives value to a coin and is known as a proof-of-work system.
Anatomy of Cryptocurrency
Although there are exceptions to the rules, there are several factors (beyond the basics above) that make cryptocurrency very different from the financial system in the past, here for the anatomy of cryptocurrency
1 Adaptive Scaling
The adaptive scale means that cryptocurrency is built with measurements to ensure that the cryptocurrency is built properly on a large and small scale. An example of an adaptive scale: Bitcoin is programmed to allow one block of transactions to be mined approximately every ten minutes. The algorithm is adjusted after each block in 2016 (theoretically, every two weeks) to be easier or more difficult based on how long it will take for the 2016 block to be mined. So, if it only takes 13 days for the mining network to block 2016, that means it’s too easy to mine, so the level of difficulty increases. However, if it takes 15 days for the mining network to block 2016, it shows that it is too difficult to mine, so the difficulty decreases. Other measurements included in digital coins to enable adaptive scales include limiting supply over time (to create scarcity) and reducing gifts for mining because more coins are mined.
Cryptocurrency uses a cryptographic system (encryption) to control coin making and to verify transactions.
Most of the circulating currencies are controlled by a centralized government so that they are regulated by a third party. Cryptocurrency creation and transactions are open sources, controlled by code, and depend on “peer-to-peer” networks. There is no single entity that can affect currencies.
The form of a traditional currency is determined by physical objects (US $ exists as paper money and in the years originally supported by gold, for example), but all digital cryptocurrency. Digital coins are stored in digital wallets and transferred digitally to someone else’s digital wallet. There are no physical objects.
5 Open Source
Cryptocurrency is open source. That means that developers can create an API without paying fees and anyone can use or join the network.
Most cryptocurrency uses a proof-of-work system. The proof-of-work scheme uses computational puzzles that are difficult to calculate but easily verified to limit cryptocurrency mining exploitation. Basically, this scheme is similar to the difficulty in solving “captcha” which requires a lot of computing power. NOTE: Non-proof-of-work (such as proof-of-stake) systems are also used.
The cryptocurrency owner keeps their digital coins in an encrypted digital wallet. The identity of the coin holder is stored in the encrypted address they control – not attached to a person’s identity. The relationship between you and your coins are pseudonymous, anonymous as a ledger that is open to the public (and thus a large book could be used to gather information about a group of individuals in the network).
In order for something to be an effective currency, it must have value. US dollars are used to represent real gold. Gold is rare and requires work to mine and purify, so scarcity and work provide value, in turn, provides the value of the US dollar.
Cryptocurrency works together on value. In cryptocurrency, “coins” (which are nothing more than those approved by the public on ownership records) are produced or produced by “miners”. These miners are people who run programs on hardware made specifically to solve proof-of-work puzzles. The work behind the mining coins gave them value, while the scarcity of coins and their demand caused their value to fluctuate. The idea of ?? work that gives value to a currency is called a “proof-of-work” system. Another method for validating coins is called proof-of-stake. Values ?? are also created when the transaction is added to the general ledger because it makes the “transaction block” that is verified requires work as well. Furthermore, the value comes from several factors such as utility and supply and demand.
Finally If at this point you still feel a little confused, don’t worry! This is because understanding cryptocurrency concepts is indeed a challenge. Even tricks about cryptocurrency won’t be a problem if you don’t understand them at first, because every new video, explanation, or article that you learn will make your understanding of cryptocurrency more clear and until you finally understand.