What is Cryptocurrency & How it works?

Everyone is talking about cryptocurrencies right now, but, what does all of it mean? In this blog we will understand What is Cryptocurrency & How it Works ?

We will also look at why it keeps becoming more important day by day and what is the dark side of it.

Time before Cryptocurrency

As banks became established institutions and governments had control, we realized that as long as there was trust in the system, we could move away from needing to carry blocks of precious metal (gold or silver coins) towards something even more convenient – Paper Money.

Now the Paper Money has no value of its own, It just has value because the government says it has values like $10 Note or $100 Note.

This is just a receipt, a kind of proof that you own a certain amount of money. But as technology improved further, we found even more convenient ways of storing and trading our stuff.

We’re now in the digital phase, where more people than ever are buying things online and using credit cards, and, when you’re at that stage, you see very less paper currency or don’t see at all anymore.

What is Cryptocurrency ?

The way to think about a cryptocurrency is that it’s 100% virtual. I know the logo for bitcoin looks like a physical coin but it is a virtual currency.

With crypto, there is no gold, there is no silver, there is no paper. It is just the transfer of digital assets.

Think of them as literally just running spreadsheets of who’s paid what to who, but instead of multiple banks keeping their separate records and with crypto, there is just one enormous spreadsheet of every transaction made using that currency, and this is called a ledger.

We all have a good spreadsheet, but what’s all the fuss about? Why is everyone going crypto crazy?

Well, there are some distinct advantages to a currency system like this one. It’s decentralized, which means that every transaction of a given cryptocurrency is recorded on the same ledger.

There are many copies of that ledger and anyone who is a part of the work has one.

Cryptocurrency Mining

You might have heard of cryptocurrency mining or bitcoin mining. Well, all that is set up on a computer to crunch through transactions on their copy of this ledger spreadsheet.

There are already about a million bitcoin miners around the world, and bitcoin is just one type of cryptocurrency.

Safety in Cryptocurrency

The reason they’re doing mining is, if you dedicate your computer’s power to mining, say bitcoin, then you will earn some bitcoin as compensation.

The result of this is, if I go into a store and spend five bitcoins on something, then instead of just checking with one bank’s record the shop instead checks with every single computer on this network.

If I have enough and assuming I do, each computer will give, go ahead, and then every single one will update their records independently.

So because you end up having this many copies of the same ledger, it becomes very easy to tell if anyone’s trying anything Fishy.

If some hacker tries to hack into someone’s computer that’s on the network and give himself more money by adjusting figures on their copy of the ledger. It’s not going to get through.

The system will realize that 99.9% of the copies on the ledger are saying one thing, but one of them is saying something else, so must have been tampered with.

There is a very clear organization to the system and I think people believe in it because they see the future as open, traceable transactions, much more so than having, like some bits, the record over here and other bits over there.

I know it seems complex at this point. But as we go through this I think you’ll realize that for a lot of people, in a way it’s simpler.

There are plenty of areas in the world that have internet access, which is all you need for crypto but don’t have access to traditional banks, which require a lot of paperwork and documentation.

But the main part of crypto is that you don’t need banks anymore because everything is stored by the people on this ledger.

You can make international payments almost instantly instead of taking half a day with no spending limits.

Also, you don’t need to word about exchange rates, you don’t need to worry about interest rates, and even transaction fees are close to zero for some cryptocurrencies.

Blockchain

The reason why cryptocurrencies are called cryptocurrencies is that they’re secured by cryptography. One example of this, is a lot of the major cryptocurrencies like Bitcoins uses blockchain.

Now people often get confused by this, Blockchain is not Bitcoin and it is not a currency itself. It is just a secure type of ledger.

So you know that big spreadsheet that everyone has, that’s recording transactions.

Blockchain is just a way of organizing it, into blocks. So every time I pay for something with bitcoin that transaction is recorded as a block.

Each block contains transaction data like who is paid and how much cash, which is a unique identifier, and the hash of the previous block in the sequence or the last transaction that was recorded.

And the pivot on which this system rests is that if something in a block is changed, then that block hash will change.

Each block contains the data of the previous block. If the hash of the previous block here changes, then the next block will no longer have a matching hash with it and so every subsequent block after that one becomes invalid.

If you combine this with what we talked about earlier, this whole idea of a million different users all having their copy of the blockchain ledger, then if I wanted to fraudulently create a transaction that, I’d have to not just tamper with a block but every single block after it.

I’d also have to do this on at least half a million computers around the world so that the majority of computers in the system are also consistent with the one I’ve tampered with,

This is probably not going to happen, whereas People can just hack into someone’s bank account and send money.

You’ve probably heard of people putting money into cryptocurrencies, and all that means is that they’re exchanging normal currencies like dollars for cryptos, like bitcoin.

They’re hoping that those cryptocurrencies become the next big thing and therefore suddenly shoot up in value, at which point they can then either spend them or just exchange them back for more dollars than they bought them.

But the one decision that someone would have to make at this point is which cryptocurrency? Because we’ve talked about bitcoins, bitcoin is just one of over 4000 different cryptos already and each of them has different properties.

Crypto is in a pretty weird place right now and this brings me on to its problems. The dark side, one of the main ones, is exactly this.

Darkside of Crypto

The reason, I think a lot of people don’t take crypto seriously is its volatility, because these currencies are so new and they’re completely digital and, like, say, the gold market.

No one knows what they should be worth, and so you find that crypto prices are quite heavily speculative. They’re tied to the news cycle, like when a glowing article comes out about the price, spiral move upwards.

But when Elon Musk posts the tweet that they’re not accepting Bitcoins as a form of payment, they go down too.

In most places, I can now book holidays with crypto, can donate to Wikipedia with crypto, but there’s been a lot of companies who are pretty back and forth with it.

Microsoft, Tesla, even Burger King are examples of companies who said they were going to accept bitcoin, and then they said they weren’t going to accept bitcoin.

There can be an environmental concern. The whole reason why a lot of these cryptos are so secure is because of this concept of transactions being verified many, many times by many, many computers.

I think it’s a fair criticism that that in itself creates a fundamental inefficiency that much computing power requires a lot of electricity. But at the same time, you could counter this by saying that traditional banking uses more electricity.

There are new equations with better technology that are all more efficient, and that one day will be able to get that electricity from renewable sources.

There’s also a pretty strong sentiment that because there’s no real policing or regulation on crypto right now, it’s like the perfect currency for criminals.

But to be honest, I think the data speaks for itself on that one. 0.34 percent of crypto transactions are used by criminals but up to 5 percent of normal cash transactions are criminal.

And I think that’s because it’s a bit of a misconception that currencies like bitcoin are anonymous. They’re pseudonymous, which means that even though your actual details are visible to everyone, your public key, your unique identifier will be permanently baked into the blockchain upon making transactions with it.

On Contrary, Cash is just a better currency for most types of criminal activity because, by its very nature, it’s untraceable.

But as well as the negatives, there are also just some straight-up odd things that have come about because of crypto.

Blockchain Uses:

For example, you might have heard of an NFT, a non-fungible token.

If you haven’t, you might want to take a seat for this one. So, you know, now you can go into an art gallery and you can pay to own a painting.

Well, now thanks to the blockchain, you can pay just to have digital ownership over something so it doesn’t stop anyone from using or sharing that thing.

But all it means is that you’d effectively be the owner of the original. And they’d all be sharing copies of it even if, for most intents and purposes, they look and behave identically.

Like a lot of these, NFTs are just JPEG images. I think the reason some people find this stupid and kind of funny is that there’s a distinct difference between buying an NFT and buying the rights over something.

So if you buy the rights, if it’s something that’s a very legitimate purchase because you can create merch or sell licenses with an NFT, you can’t.

The original owner still has all the reproduction rights over that piece. All it is that you’re using the blockchain to prove that you have some ownership over that assets.

This is all about cryptocurrency, It’s an interesting world out there.

Hope you liked our Article on “What is Cryptocurrency and How it Works” .

Please read our other article on “When to sell Cryptocurrency“