What are cryptocurrencies ? How do they work? These doubts would have been on nearly everyone's intellect at least once in the year 2020.
Are you too one of these people who were wondering what cryptocurrencies are and why people use them? If you are then you don’t need to look any further, as in this article, we'll cover both of these questions in a simple way so that you can easily understand it.
Cryptocurrencies are starting to pick up pace and these days, they are also increasing in demand. A lot of stores nowadays don't prefer cash, instead they prefer digital payment methods such as Google Pay or PayTM. Currently, other than digital wallets, other digital methods of paying are also emerging, such as cryptocurrency.
The universal economy is inescapably heading towards a digital ecosystem in which from savings to payments, everything is going digital. The latest and most favourable insertion to the digital payment zone is cryptocurrency.
What is cryptocurrency?
Nowadays most people don’t prefer using cash, so they look for an alternate source to pay. One such way to pay is by using cryptocurrencies. In simple terms, a cryptocurrency is a digital cash, designed to work as a medium of trade. A digital cash which also aims to be decentralised, global, independent, trusted and quick. Cryptos also need to use strong cryptography, the encryption and decryption of sensitive information, to secure transaction data. These words given above describe how a crypto could be successful and what a crypto actually aims to be.
The idea of making cryptos successfully has been the talk for decades. B-money was one of the earliest proposal for an electronic cash system (cryptos). Since then a lot of people have tried to make these currencies by themselves too but only a few of them are successful and reach the whole world. One such example of a successful cryptocurrency is Bitcoin.
One of the first and most valuable cryptocurrency is Bitcoin.
Bitcoin’s domain name, “Bitcoin.org”, was registered in August 2008 but the bitcoin network officially came into existence in January 2009. Since then, over $7 trillion worth of bitcoin has been transferred.
How was the idea of cryptocurrency invented?
A few decades ago, a lot of people were unaware of any kinds of digital cash. This was because back in those days, not a lot of people could understand them let alone use them. Though a lot of people could not understand the concept behind it, there were some population who understood what a powerful tool it was.
One such group that understood the concept behind tried to create a digital cash system called HashCash. The concept of HashCash was introduced in 1997 by the cryptographer Adam Beck. He suggested that they could use the Proof-of-Work tool to confirm transactions. Hashcash was one of the most fortunate pre-bitcoin currency.
How does Cryptocurrency work?
Cryptocurrencies run across a network of computers which means that one specific authority does not have control over it. This is just the opposite of fiat currencies, such as the dollar, as they are run and managed by the government.
We can say that cryptocurrencies are decentralised which means that several authorities rather than a single one has control over it. No one organisation can determine the value of these coins, which keeps it safe and secure.
What role does Blockchain play in cryptos
The same group that created Bitcoin ( called Satoshi Nakamoto) created an out-of-the-world invention known as Blockchain. You would definitely have heard of blockchain if you are familiar with the terms “cryptos” and “crypto wallets”.
Blockchain technology is a list of blocks that collects transactional information in groups and stores the transactional records in these data structures called blocks.
In other words, you can say that Blockchain is a distributed ledger system that records information in a block and each block has a cryptographic hash of the previous block which links them both and thus creates a chain.
Blockchain is managed by a distributed network of computers that are called nodes. Every single person who interacts with blockchain can contribute to the system. Each user that engages with the blockchain does so with a new created address that does not reveal their identity.
Every transaction that you make goes through the same steps regardless of whether it’s used for some financial transactions or some other transactions.
If the same information is introduced in the input, it will always deliver the same hash in the output. If the data value is unchanged, then the hash values are the same. Even if a very small change in the input information is made then the whole output will change. After a small change, the output hash will widely differ and won’t even match the actual output by even a small amount. This effect is known as the avalanche effect.
Wanna dig into the depths of Blockchain Technology? Then click here.
How are blocks added to Blockchain
First to understand how Blockchain works, you must master the concept of blocks, so let’s have a look at what blocks are:
Blockchain technology consists of important concepts such as blocks and nodes. Let’s have a look at what blocks are :
Blocks are essential for Blockchain, without blocks, there is no Blockchain. As you can understand from the word ‘Blockchain’, it is a chain of blocks in which each block is connected to its previous one. Blocks are just like files. When you create a file you can store an amount of data in it. Similarly in each block, you can store a specific amount of data. This data that is stored can never be erased which means that it is permanent.
Each block made consists of three main elements :
- Info (The data in the block)
- Nonce (A 32-bit number which is randomly generated for every new block)
- Hash (A 256-bit number that is linked to the nonce)
When a new block is generated, a cryptographic hash (256-bit number) is generated by the nonce (32-bit number). Then ,the data in the block is considered done.
Now lets see the steps to how a block is added to blockchain :
- A transaction request is initiated
- A request is sent
- A block representing the transaction is created
- Broadcasted to every node in the network
- Approved and validated by the network
- The new block is added to the existing blockchain
- The change is updated across the network
- Transaction completed
Are cryptocurrencies safe
A lot of people might be wondering whether cryptos are safe to buy or not. Although there are some chances that illegal transactions might be made, the truth is that it actually is secure and evaluated and vetted by blockchain technology. Almost all cryptocurrencies like Bitcoin, Litecoin or Ethereum are secured by a technology called blockchain. A cryptocurrency blockchain constantly verifies every single transaction ever made with that currency.
You don’t need to give away your information
One great thing is that you don’t need to provide your financial information to the merchant. This protects your personal information from being shared to third parties like payment services.
Also, there will only be a very small chance that your information might be stolen as no personal information is being shared to someone through the internet.
Your cryptos are always available to you no matter what happens to the finance system as they aren’t tied to any single authority like a financial institute.
What is Cryptocurrency mining?
Mining is a process through which transaction details are added to the blockchain public ledger. The miners job is to find a solution and successfully add the block to the existing chain. As a result, they would receive a reward denominated in the blockchain’s native currency. The main purpose is that if your device contributes to the process of mining, you’ll get a share of the money.
For example :
When bitcoin was first introduced, mining one new block would earn you 50 Bitcoin (BTC). Three years later, this was halved to 25 BTC. By 2016, this was halved again to 12.5 BTC. On May 11, 2020, the reward halved again to 6.25 BTC.
This means that the reward was decreased by 12.5% of the initial amount. As the value of bitcoin kept increasing, the mining reward kept decreasing.
The most important feature of the Crypto network which shields it from malevolent deeds is the Proof of Work consensus algorithm. This algorithm uses cryptographic methods that cause the mining process a few disadvantages. It causes the mining process to get very expensive as well as exacting which generates a particularly competitive environment for mining. This makes crypto mining a very competitive and hard job. As more miners join the network, it becomes increasingly difficult to make a profit and miners must seek efficiency to cut their operating costs.
There are also a lot of ways through which we could perform the task of mining. These ways are by Cloud mining, CPU mining, GPU mining and ASIC mining. We will look at those in detail in another article.
Public – Key Cryptography (PKC)
Public-key cryptography, which is also called asymmetric cryptography, was invented in the 1970s by leading cryptography scholar, Martin Hellman. It consists of a pair of keys –
- i) Public keys
- ii) Private keys
Public keys and private keys are a part of public-key cryptography. Public keys are used to encrypt data and private keys are used to decrypt data. They are a sophisticated form of cryptography. A private key in bitcoin is a 256 – bit hexadecimal. An example of a private key in bitcoin is – E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262
This is a sample private key, do not use it or you will lose your money.
The main differences of public and private keys are:
Efficiency – Private keys are a faster mechanism than public keys as it can be used to both encrypt and decrypt the data. On the other hand, public keys can only be used to encrypt the information.
Anonymity – The private key is shared only between the sender and the receiver of the information. However, the public key is free to use for everyone.
To explain public and private keys in more simpler terms, a public key is like a username. It can be known to everyone and is not so secret. A private key is like a password. Only with the private key you can decrypt your information – you cannot login with only your username. The private key is private and no one other than you will know it.
Advantages of Cryptocurrency
Very less or no transaction fee
Unlimited transaction possibilities
No third party required
Easy to convert currencies
When using cryptos, you don’t need to wait a couple of days to receive cash. Cryptocurrencies offer a very fast transaction that no other banking transactions offer today.
The transactions are normally free. The commission fee in this system is lower than in any other.
The user has the option to speed up their transaction by offering transaction money.
You can pay to anyone, anywhere by using your wallet. The transaction cannot be controlled or prevented so you can transfer amounts to any user.
Privacy and security have always been a major concern in people for cryptocurrencies. Cryptos are completely anonymous and at the same time fully transparent.
You can transfer cryptos online without the need of a middleman such as a bank. You can transfer anywhere to any user’s digital wallet at any time. Instead of credit card companies and banks, cryptocurrency uses public keys and private keys to secure the cryptos.
With cryptocurrencies, you can easily convert the money from one currency to another, for example from pounds to dollars. You can transfer money from one wallet to another and change the currencies with minimal transaction fees.
Disadvantages of Cryptocurrency
Payment is not reversible
Chances of easily being losen
Not widely accepted
Many people do not understand what cryptocurrencies are and thus aren’t used and accepted everywhere. This is a major disadvantage of cryptos.
Cryptocurrencies are private and secure. This can be both an advantage and a disadvantage. Due to its ‘anonymity’, it is harder for the government to track the person who transacts the money. Thus, many illegal activities can be conducted for example selling drugs in the Dark Web.
If someone mistakenly sends funds to a wrong wallet address, then there is no getting the money back. The only thing you can do then is ask for a refund and if your request is turned down, then there is nothing that you can do. This reduces the likeliness of a merchant being defrauded
You can say that cryptocurrencies are ‘volatile’. That is, the market for cryptos is likely to change rapidly, especially for the worse. It’s like playing with fire. There are high risk factors and can be risky to invest in them.
Cryptos can easily be lost if your hard drive crashes or anything similar happens. For example, if you forget your password, you can’t get it back. All your investments will be gone. As it is highly secured, you cannot crack the password so easily. So, you must note down your passwords and keep many sources so that the chance of your cryptocurrencies being lost is reduced.
Cryptocurrencies haven’t been accepted all over the world yet. So, you can’t depend on them for every payment. Countries such as Bangladesh, Algeria and Ecuador haven’t accepted cryptos yet.
The list of a few cryptocurrencies
The top 10 major cryptocurrencies are that people are aware of:
- Bitcoin Cash
- United States Dollar
The top 10 major cryptocurrencies in accordance of their market capitalisation are:
- Bitcoin ($639,959,697,617)
- Ethereum ($163,040,444,391)
- Tether ($24,921,069,647)
- Polkadot ($16,294,214,344)
- XRP ($12,661,929,034)
- Cardano ($11,231,687,216)
- Chainlink ($9,752,313,584)
- Litecoin ($9,597,381,614)
- Bitcoin Cash ($8,502,134,487)
- Binance Coin ($6,631,868,234)
Cryptocurrency’s role in the future
The future of cryptocurrency is still a big question. Cryptocurrency is a relatively new concept and is only at its beginning. A great future is undoubtedly awaiting them. A lot of people don’t trust them, let alone understand them. Soon, everyone will catch their niche in the market of cryptos.
If everyone starts to understand, they might even be able to start trading. Cryptocurrency plays a vital role in the future. It is the future of payments and will change the way we look at money forever.
Disclaimer: Digital Wallets News does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.