This article is the beginning of series on Cryptocurrency. This is a new type of internet currency. I’ll write about 10-15 articles now, explaining everything you should know about Cryptocurrency – from the introduction to mining, from units to storage, from buying to selling Cryptocurrency and much more.
Cryptocurrency or digital currency is an invention of the Internet age. Their story began with the fact that some people once came up with the idea ” Hey, why do not we create money for the Internet, which no state can pile on?”
The idea turned out to be successful and now the market has more than 4,000 crypto-currencies.
Most of them are created on the principle of ” just for fun ” ( or, more simply, for entertainment ) and are practically useless. Others were originally developed as alternative banknotes and, thanks to the efforts of their creators, they today have a mass audience and a profitable exchange rate relative to real currencies, for example, 1 bitcoin costs more than $ 7,000.
Initially, when there was only Bitcoin, Satoshi Nakamoto, and other developers call it electronic cash ( electronic cash ), but after a controversial article in Forbes, the name ” cryptocurrency » ( cryptocurrency ) is well established for this class of electronic instruments.
What is a Cryptocurrency in simple words?
The term ” crypto-currency ” is formed from two words: cryptography and currency, that is, a protected electronic currency, based on the principles of encryption by mathematical algorithms.
Saying that such a cryptocurrency in simple words, we can give the following definition: it is an encrypted decentralized monetary unit, which can be freely transferred between the network participants, and also used to pay for various goods and services.
Since most virtual money systems are not controlled by national governments, they are mainly used as a means of financial exchange, which operates outside the state monetary policy.
In the west, another definition is also popular. Therefore, in response to a question about what a cryptocurrency is in simple words, you can hear: ” This is electricity converted into lines of code that have a real monetary value .”
After all, cryptocurrency is actually a pure code that was created using mathematical calculations on a PC and packed into an encrypted container. And the value of such money is not supported by goods or raw materials, but solely by the desire and demand of the users themselves. Therefore, any assets in this category tend to grow very fast and fall, which makes them extremely volatile and risky.
How the Cryptocurrency works – the basic principles
A full understanding of “what a cryptocurrency is”, is impossible without knowing how it works ( at least superficially ). To get a more detailed idea of the concept of virtual money, knowledge of the following terms will help:
Blockchain (chain of blocks)
This is a kind of ledger, which automatically records data about all transactions in which each currency unit participated. Copies of the chain of blocks are stored in the user’s wallet, in the money itself, the P2P network nodes through which the currency and the special public server are distributed. Due to this component, virtual banknotes are unique, which prevents the appearance of clones and counterfeits. Technically, no transaction with crypto-currencies occurs without adding blocks to the chain, and after this happens, it becomes irreversible.
An important point: the chain contains information only about the money itself, and not about its owners, so the entries can not be used to deaononize the user.
For all crypto-currencies there are “purses” with unique information identifying their owners. They are reliably encrypted using private keys, which ideally reduce the risk of virtual money theft to near zero. Why ideally? Single cases of hacking wallets do happen. For example, the Japanese Bitcoin-Exchange Mt. Gox declared bankruptcy after hackers stole virtual money in the equivalent of 450 million dollars. However, this theft was the result of a targeted attack by a group of specialists with the help of powerful computing equipment. Therefore, ordinary users have nothing to fear – their hacking for intruders is economically inexpedient.
Transaction is the transfer of funds between two digital purses. First, the data about it are received in the public book and are awaiting confirmation. And when the mathematical proof that the transaction comes from the owner of the wallet will be received, the process will be completed.
Under this process is meant the extraction of virtual money by users, who are called miners or “miners”. They generate new monetary units or add data about checking the latest transactions in a public book (a chain of blocks). To perform these tasks, “miners” solve on their devices complex mathematical puzzles. Such a scheme was developed in order to obtain solutions that are easy to verify, but very difficult to find. When one of the miners decides a puzzle, it passes the result to other network members who are checking its correctness. If everything is in order, the money is added to the general register, and the “miner” who successfully solved the puzzle is rewarded.
Knowledge of these terms gives a more or less detailed idea of what a Cryptocurrency is and how it works.
In the coming articles, we’ll learn more about Cryptocurrency like units of Cryptocurrency, buying and selling of Cryptocurrency and much more.