WHAT IS CRYPTOCURRENCY?
In order for us to fully appreciate cryptocurrency, we need to understand the term. A lot of people run from using cryptocurrency because they invested with some failed business using crypto as payment method. As a result the word crypto sounds like a taboo. So the question is, what is cryptocurrency? Cryptocurrency is a purely digitized currency. It is made using cryptography (high-level encryption) making it nearly impossible to counterfeit. It is an asset that has been digitally designed to function as a medium of exchange and a store of value. Cryptocurrency uses cryptography (high-level digital security) to protect and enhance transactions as well as manage the inclusion of additional units of that particular currency.
The creation of cryptocurrency involves the conversion of information into codes and they are difficult to crack. These codes essentially monitor the cryptocurrency exchanges throughout a network. Cryptocurrencies were essentially developed to reduce the manufacturing of national currency. This would in turn limit the total quantity of the currency in circulation.
The first cryptocurrency developed was bitcoin in 2008. However, before the invention of Bitcoin, there had been so many failed attempts to develop a digital currency. After observing the causes of the failures, Satoshi Nakamoto eliminated the idea of a centrally-controlled system instead he built a peer-to-peer network system. This decentralization was the birth of the rise of cryptocurrency.
In traditional banking, there’s a central authority that controls, maintains, and updates a centralized record (ledger). That means that every single transaction has to go through the central banking system, where it’s recorded and verified. Plus, it’s a restricted system — only a small number of organizations (banks) are allowed to connect to the centralized banking system directly.
With cryptocurrencies, there’s no central authority, nor is there a centralized ledger. That’s because cryptocurrencies operate in a decentralized system with a distributed ledger known as the blockchain. Unlike the traditional banking system, anybody can be directly connected to and participate in the cryptocurrency “system.” You can send and receive payments without going through a central bank. That’s why it’s called decentralized digital currency.
In addition to being decentralized, cryptocurrency is also a distributed system. This means the record (ledger) of all transactions is publicly available and stored on lots of different computers. This differs from the traditional banks we mentioned earlier, which are centralized systems.
But without a central bank, how are transactions verified before being added to the ledger? Instead of using a central banking system to verify transactions (for example, making sure the sender has enough money to make the payment), cryptocurrency uses cryptographic algorithms to verify transactions.
HOW CRYPTOCURRENCY WORKS
Cryptocurrency is created through a procedure called mining. This involves an electronic process and requires an electronic wallet. The term crypto mining means gaining cryptocurrencies by solving cryptographic equations through the use of computers. This process involves validating data blocks and adding transaction records to a public record (ledger) known as a blockchain. Mining is done through a data platform or software from a service provider.
The mining process involves a lot of computation and becomes increasingly complex as its corresponding platform progress. Some mining process involves finding the solution to cryptographic puzzles and this consumes high levels of computer power. Miners are experts within the cryptocurrency networks responsible for the creation of currencies and confirmation of transactions. Confirmation is a crucial stage in cryptocurrency deals. An unconfirmed transaction can be altered because it is still on the pending list (mem pool). However, once a transaction gets confirmed it cannot be reviewed or tampered with and it becomes a permanent record on the blockchain’s transactions. Miners are the only people who validate transactions, which is their primary responsibility. Anyone can be a miner; the miner receives tokens as a form of payment for their role in the network. Once the many puzzles have been solved a miner builds a block and adds it to the blockchain. Proof of work (PoW) is a form of cryptographic zero-knowledge proof in which one party (the prover) proves to others (the verifiers) that a certain amount of computational effort has been expended for some purpose.
The Merit of Cryptocurrency
- Universality: Cryptocurrency is universal, as its usage is not influenced by physical location. Once a smooth flow is established there is no need for a physical meeting
- Instant Transaction: Initiation and confirmation of transaction is carried out almost instantly.
- Guaranteed Safety: They are securely stored using cryptography. The uniqueness of private key required to authenticate transaction and the provision of constant random cryptographic numbers makes it impossible to steal of divert funds
- Unrestricted access: They are readily accessible and available without restrictions for anyone’s use irrespective of age, religion, bias, tribe, location, gender, etc… No permission whatsoever is needed
- Anonymity: Cryptocurrency accounts are not linked to real life identity. The addresses are a series of randomly generated characters belonging to participants. While they can be used to monitor and analyse transaction flow, they do not correlate with the user’s actual address.