Increasing access to the internet and special emphasis on a cashless economy led to the emergence of virtual currencies across the globe, which are popularly known as cryptocurrencies. Investing in Crypto has become a trend for the working class people owing to the handsome returns offered by it. However, it is observed that people find it very difficult to understand how this entire system of cryptocurrency operates. In this article, we will explore the blockchain technology, mining process, and how does cryptocurrency works among the masses.
Table of Contents
What is Cryptocurrency?
At the outset, it is very essential to understand the meaning of cryptocurrency. It is a virtual currency or a digital asset that works as a medium of exchange. The transaction details are recorded in a digital ledger. The cryptocurrency is not centralised; it is not issued by the central government or by the Reserve Bank of India (RBI) as a legal tender. So, we witness some sort of reluctance or consciousness of the government regarding cryptocurrencies.
The cryptocurrency works through blockchain technology, which serves as a public transaction database. The first cryptocurrency was issued in the year 2009 (Bitcoin). At present, more than 6000 types of virtual currencies are traded across the globe. Some of the most popular cryptocurrencies are Bitcoin, Ethereum (ETH), Litecoin (LTC), Tezos (XTZ), Cardano (ADA), Monero (XMR), Chainlink (LINK) and XRP (Ripple).
Since cryptocurrencies are virtual currencies, they can be stored and transferred digitally. The technology behind Cryptocurrency is cryptography. Cryptography is a method in which the sample data is converted into complicated codes, which are very difficult to crack. They are much more secure than real money.
What is Blockchain Technology?
Blockchain is the very basis on which this entire system operates. It can be referred to as a chain of blocks that contains information. This technique was founded in the year 1991 and was originally used to timestamp digital documents. However, it remain idle for a substantial period and it came back again in 2009 when it was adopted by Satoshi Nakamoto to create “Bitcoin “
The information in a blockchain is collected in groups which are also known as blocks. These blocks hold sets of information. The Blocks have some amount of storage capacities and when the capacity is fully utilised, they are chained into the previously filled block. This forms the chain of data, known as Blockchain. It is a type of distributed ledger which is completely open to anyone. However, once the data has been recorded inside the block, it becomes extremely difficult to change or delete that. It is an almost irreversible timeline of data. Each block in the chain provides an exact timestamp when the data was exactly fed in it.
How does Blockchain Operates?
As we discussed earlier, each block in the chain contains some data, the hash of the block, and the hash of the previous block. The storage of data inside the block depends on the type of blockchain. For instance- The Bitcoin blockchain only stores the details of the transaction (information of the sender, receiver, and the number of coins involved).
The hash of the block can be simply understood as our fingerprints; it is unique to each block and identifies it accordingly. Once a block is created, its hash is also calculated simultaneously. Hash codes are prepared by mathematical functions which convert digital information into a string of numbers and letters. If the information is edited, the hash code also changes automatically.
Is cryptocurrency secure?
The security of a blockchain totally depends on hashing and the proof of work mechanism. It produces a piece of data in a complicated form that can’t be retrieved or comprehended by unknown users. However, a lot of trial tests are conducted before valid proof is generated.
One another method through which the crypto secure itself is distribution. It uses a peer-to-peer network in place of the central entity to manage the chain. When the owner joins the network, he gets complete access to the stored data and it can easily be verified whether everything is in order or not.
The working of crypto can also be related to the functioning of bank credit or debit cards. In both cases, a complex system issues a currency and records transactions which enable people to send and receive money electronically. Likewise, nowadays, online platforms can be used to manage accounts and verify balances. However, the sole difference between cryptocurrency and bank credit is that instead of banks and governments issuing the currency in the case of cards, an algorithm does the same for the crypto.
How does cryptocurrency works on a Trading platform?
The question comes into mind that Crypto is a very popular currency but, how does cryptocurrency works? On a platform, the transactions are conducted between peers using software called “cryptocurrency wallets.” The person uses this wallet software to transfer balances from one account to another. For transferring funds, the knowledge of a password (a private key) associated with the account is essential. The transaction is encrypted and then broadcast to the cryptocurrency’s network and queued up to be added to the public ledger. The Transaction is recorded on the public ledger through a process known as“mining” All the users of a given cryptocurrency will have access to the ledger. Though the amount of the transaction is public, the details of the person conducting the transaction are encrypted. Each transaction generates a unique set of keys and whoever owns a set of keys, owns the amount of cryptocurrency-related with those keys. It is similar to the analogy that whoever owns a bank account owns the money in it.
What is cryptocurrency mining?
After knowing about how does cryptocurrency works, we should know about what is crypto mining. The People who are running software and hardware, with an aim to confirm transactions to the digital ledger are known as cryptocurrency miners. In simple terms, solving cryptographic puzzles (via software) to add transactions to the ledger (the blockchain) with the hope of getting coins as a reward can be understood as cryptocurrency mining.
How does one obtain or trade cryptocurrency?
In today’s world, a wide range of cryptocurrency currencies are available at arm’s length. One can obtain it just like obtaining other goods and services in exchange for real money. One can trade dollars for cryptocurrencies or can trade cryptocurrencies for other kinds of cryptocurrencies.
The trading is normally done through brokers and exchanges. Brokers are the third parties that perform the task of buying/selling cryptocurrency. The exchange is similar to the exchange provided for the trading of securities. However, it is always kept in mind that the prices of crypto tend to violate owing to its volatile nature. So, before investing, one should think and analyse judiciously.
Cryptocurrency is making a lot of buzz in the present times. It is based on blockchain technology and is traded through exchanges with the help of a broker. The data stored in the blocks are encrypted and it is almost impossible to tamper with it owing to the complex algorithm involved.