You’ve certainly heard of Bitcoin and other cryptocurrencies before, and you likely have a basic understanding of how they operate. Although the majority of individuals still don’t comprehend what cryptocurrencies are, how they operate, or how secure they are.
While some confidently declare cryptocurrencies to be the technology of the future, others see them as a financial «bubble» that will eventually collapse. We will make an effort to cover everything regarding cryptocurrencies in this essay, including their status, structure, and values.
A decentralized digital currency without a physical form is cryptocurrency. It cannot be placed in a pocket or another person’s hand like actual money can. Digital currencies are kept in users’ cryptocurrency wallets and only exist as an electronic record in a database.
A cryptocurrency is formally defined as a 64-digit digital code with a specific value that may be traded for products and services that are utilized in transactions, like ordinary money. A coin transfer modifies a transaction on the blockchain, an online ledger that keeps track of all bitcoin transactions.
The name «cryptocurrency» (cryptocurrency) was first used in a 2011 Forbes article on Bitcoin. Cryptocurrencies get their name because cryptographic technology is used to protect the network and verify the transactions that use it.
By using cryptography, the main features and benefits of digital coins are provided:
Network coins flow directly between users (P2P) without any third party control or involvement. And all users are absolutely equal and no one has any privileges. The security and integrity of their relationship is controlled by a digital code.
Properties of cryptocurrencies
The establishment of the Bitcoin network in 2009 is recognized as the official year of the invention of cryptocurrencies. Direct anonymous transactions with a high level of security have not been possible before. But Satoshi Nakamoto succeeded in making the long-term advancement of computer science and cryptography professionals into reality by launching the initial Bitcoin cryptocurrency, on which all subsequent iterations were based.
Considered the «father» of all cryptocurrencies, Satoshi Nakamoto. But even after more than ten years, it’s still unclear who came up with this moniker, whether it was a group of people or just one, or how long it took. It is clear that Nakamoto sparked a conversation about the issues with conventional finance, irrevocably altered how people view money, and helped to launch a promising new sector.
Currently, there are more than 3,000 cryptocurrencies. It was «the pioneer»: Bitcoin. It is now valued at the top of all cryptocurrencies and is appropriately known as «digital gold.» The open source BTC code that formally represented the mainnet branches served as the foundation for many altcoins. Later, totally fresh, original cryptographic initiatives with distinctive work algorithms emerged.
Thus, the first «unbundled BTC» was created when the Ripple network was introduced in 2011. The network operates entirely without digging and is based on a handshake method. Projects like Omni and NXT received funding for expansion in 2013 via initial coin offerings (ICO). The latter was different in that 73 investors received all net coins.
The introduction of the Ethereum network represented the true innovation in the sector. The ecosystem on which the platform runs decentralized blockchain-based applications. Over time, Ethereum overtook Bitcoin as the second most valuable asset. However, it stands out not because it is expensive but rather because thousands of exciting new projects have been created using Ethereum’s «smart contracts.»
How Bitcoin Operates
The concept behind cryptocurrencies was to build a decentralized anonymous network that would enable transactions to be made outside of the banking and governmental systems. As central institutions, such state apparatuses and central banks, serve as guarantors and guarantee the security of transactions, assuring security was the key challenge. The answer was blockchain.
All cryptocurrency transaction records are kept in a digital database called blockchain. It is entirely open and decentralized, not held on the computers or servers of any certain business or organization but rather by all network participants who have full-fledged wallets installed on them.
Blocks of data are linked together to form the blockchain ledger. A new block must always contain the sum of its predecessors’ hashes. It is therefore impractical to alter or hack a block because doing so would require altering all earlier blocks in order for the network to accept the modified information as accurate.
Blockchains for cryptocurrencies keep track of data, carry out transactions, and validate them using encryption and cryptographic hash functions. A user’s private key and public key are separate. The secret key acts as the wallet’s access key and signature, allowing you to «rewrite» the ownership of the money. The public key is the wallet’s address.
What source does the cryptocurrency have?
Users mine the majority of cryptocurrencies themselves. In order to identify the best shortcut for signing a block of transactions, mining involves leveraging computer technology (ASIC miners, graphics cards, and processors) to solve mathematical problems. Forging, or tuning with coins, is another mining technique. For the goal of selling the original and luring investors to the project as part of the ICO, some cryptocurrencies are right away issued by the developers.
Mining resembles working in a stream in certain ways. Peer-to-peer file distribution is handled by users, who are rewarded with ratings that can be used to submit new files. In turn, the miners scan the block for the signature in order to maintain the network’s functionality. To validate transactions in the instance of Bitcoin, new currencies are created by resolving mathematical puzzles. Miners utilize computer technology to search for a cryptographic signature for a transaction block, either individually or in groups. A new batch of BTC coins will be awarded to the first person to discover a signature on the block.
At the same time, the issuance of most coins is limited. For BTC, the maximum number of coins that can be issued is 21 million and this number is never changed. After the end of the issue of new BTCs, miners supporting the network receive a reward in the form of commission from users.
There are different types of mining:
Proof of Work (PoW) or «proof of work». Verification of PoW transactions is done by solving mathematical problems. Bitcoin works on the PoW algorithm. The profitability of mining in this case depends on the computing power of the miner.
Proof of Stake (PoS) or «Proof of Stake». Transactions are verified by users who have a certain number of coins in their account. In fact, mining is done for money, and the more cryptocurrencies in a miner’s accounts, the more rewards he can receive.
Proof of Activity (PoA) or «Proof of Activity». This is a mixed option that includes both PoW and PoS mining elements.
There are also less popular algorithms, for example, Proof-of-Capacity, Proof-of-Burn, Proof-of-Storage. Each of the algorithms has its own characteristics. For example, Bitcoin uses the SHA-256 encryption algorithm, whose computing performance depends mainly on the performance of the technology. The script hash algorithm used in Litecoin, for example, is more sensitive to the amount of RAM. For more information on cryptocurrency algorithms and their differences, see PoW vs. PoS.
Why are cryptocurrencies necessary?
Cryptocurrencies are an unregulated form of money that function independently of governments and the established banking system. Like conventional money, it can be used to make payments, cover expenses, make purchases, send money, and accumulate savings.
Principal ways to use cryptocurrencies:
Colculations. Fast, anonymous transactions between users are made possible by cryptocurrencies. Additionally, they function in areas without access to the banking system. To complete a bitcoin transaction, you simply need access to the internet and some basic information. Payments with digital currency are effectively limitless. No matter where the transaction originates from or where it is headed, it has the same minimal fees and doesn’t involve any cross-border shipping costs or currency conversion.
Safe storage. When used correctly, it is almost impossible to steal a cryptocurrency from a wallet. It is securely protected by cryptography and all transactions in the blockchain are irreversible. In addition, many cryptocurrencies have a built-in anti-inflation mechanism — limited emission and its gradual reduction, coin combustion mechanisms.
investments. Due to the large fluctuations in value and the increase in the overall popularity of cryptocurrencies, they are a valuable asset, and digital coins are suitable both for long-term investments and for earning from speculative activities. Behind many cryptocurrencies there are projects that solve global problems in the financial sector. As such projects develop, the value of their coin tends to increase. The cryptocurrency market is highly volatile. The cost of coins can change several times a day, which in turn allows you to earn from the difference in costs when trading on the stock market.
Business. More and more companies and projects want to implement blockchain in their architecture. In addition, startups dealing exclusively with cryptocurrencies are also developing. The cryptocurrency market even has its own effective ICO crowdfunding method that allows you to start a fundraiser for project development with just one promising idea that is outlined in the white paper.
Currently, cryptocurrencies are a multifunctional financial instrument. They found many more apps than the developer initially expected. Cryptocurrencies are both a convenient cross-border payment method and a valuable asset comparable to corporate stocks.
What is support for cryptocurrencies?
Since cryptocurrencies lack financial backing for gold reserves in addition to physical support, many people believe they belong in the same family as the financial pyramid. Contrary to popular misconception, no country’s currency, as of right now, is totally backed by gold. For a very long time, the value of fiat currencies solely served as a barometer of a nation’s political stability and economic health.
The selection of cryptocurrencies is comparable. Users’ confidence in the network is reflected in the value of digital currency. The coin rate is essentially a price that consumers are willing to pay and is based on the market’s supply and demand conditions.
In addition, the course is supported by two other factors:
- First of all, grid maintenance and mining require efficient equipment that consumes a significant amount of electricity. In some cases, the costs of issuing coins are allocated to their value.
- Second, blockchain used in cryptocurrencies is one of the best technologies. It is universal, decentralized, safe and applicable in various areas of life, from the financial sector to alternative energy sources.
Despite the lack of security in both cases, many cryptocurrencies are rather skeptical. Many see it as a bubble. For example, computer scientist and billionaire Mark Cuban has criticized Bitcoin, noting that it is more like a religion or cult than real estate, and even a simple Twitter post could lower the value of peace. True, the Cuban later started investing in ICOs himself, advising people to keep a tenth of their wealth in cryptocurrencies.