Cryptocurrency is a virtual currency developed using cryptography to enhance security.
As a virtual currency, it is associated with the internet and users can send and receive digital currency across the globe.
Cryptocurrencies use blockchain technology for cryptoprocessing which is a public ledger system that records each transaction.
The public ledger is decentralized and shared across private computers thus it is not managed by a single individual or entity. Furthermore, it’s not hosted on third-party servers.
Examples of cryptocurrencies include Bitcoin, Ripple (XRT), IOTA, DASH, Ethereum, Litecoin, Bitcoin Cash, and Bitcoin Gold among thousands of others.
The birth of cryptocurrencies
Before 2008, few people fully understood what cryptocurrencies were or how to create and run a successful digital cash system.
Unknown to many people, an individual or group of people using the pseudonym “Satoshi Nakamoto” published a white paper on a cryptography mailing list.
What many people don’t know is that Satoshi Nakamoto created Bitcoin as a side product and never intended to create a cryptocurrency. As the first cryptocurrency to ever hit the global market, it was designed to eliminate the bottlenecks common with the fiat currency.
At the time of the announcement, Satoshi had already created the first version of Bitcoin which was uploaded to Sourceforge. He went ahead to create the first digital wallet, bought bitcoin.org, and published the first website that hosted content related to Bitcoin.
Although the first cryptocurrency was born in 2009, cryptography itself has been around since World War II. If you remember your history well, during the war, the Allies employed all means to try and decode the Enigma which was used by Germans to send cipher texts.
Allan Turning a brilliant mathematician, computer scientist, logician, cryptanalyst, and philosopher is credited for having helped to further the field of cryptography.
This was after he helped in the deciphering of German ciphers and the creation of a machine- the Bombe – which was able to decrypt the Enigma.
Thanks to his contribution, Alan Turing changed the course of the Second World War allowing allies to overcome the Germans and the Japanese finally securing a victory for the rest of the world.
Using the principles of cryptography, Satoshi Nakamoto was able to create a digital monetary system that was decentralized.
The use of cryptography helped to eliminate the chances of double spending and also eliminated the probability of unethical individuals stealing Cryptocurrencies.
How it works
Before you learn how cryptocurrencies work, there are a few terms you need to know.
i. Blockchain – this is a public ledger that records each cryptocurrency transaction. The technology hides the identity of cryptocurrency owners and allows corresponding digital wallets to transact.
ii. Digital wallet – this is a virtual account protected by private and public cryptographic keys and allows cryptocurrency owners to transact with each other.
iii. Mining – this is the process where cryptocurrency miners use advanced computer systems to solve complex mathematical problems finally being rewarded with cryptocurrencies.
Basically, it is the process where cryptocurrencies like Bitcoin are created. The newly mined coined are usually added to the blockchain making them permanent. There are also mining calculators that help miners with return on investment (ROI).
iv. Proof of work – this is a hard-to-compute but easy-to-verify computational puzzle that eliminates the exploitation of cryptocurrency mining. Basically, it is a complex mathematical problem that advanced computer systems solve leading to the mining of cryptocurrencies.
v. Cryptocurrency Transaction – this refers to the transfer of funds between digital wallets.
When users initiate a transaction, the P2P network utilizes an encrypted electronic signature which helps to provide mathematical proof that a transaction is originating from the correct owner.
Peer-to-peer networks
As said earlier, cryptocurrencies use peer-to-peer networks to transact. The peer-to-peer network consists of private computers spread globally. To connect the computers, blockchain technology is used which acts as a public ledger and records every cryptocurrency transaction.
To transact with cryptocurrencies, you need to have a digital wallet. This is a virtual account protected by private and public cryptographic keys. Just like your traditional wallet which holds your valuable cash and credit cards, the digital wallet holds your cryptocurrencies too.
As a virtual wallet, you can access it from anywhere in the world. All you need is your digital wallet address and you are good to go.
One thing you need to know is that your digital wallet is protected by cryptography and it’s difficult for hackers to steal your cryptocurrencies without your knowledge.
Today, users have access to both web, physical, paper, desktop, hardware, and mobile wallets. As a result, users can receive cryptocurrencies right into their smartphones.
To send cryptocurrencies, you must have the virtual wallet address of the other user. All you must do is log in to your digital wallet, buy cryptocurrencies if you don’t have any, add the address of the receiver, add the quantity to be sent, and submit. The receiver’s digital wallet will receive cryptocurrencies in minutes from anywhere in the world.
Unlike fiat currency, cryptocurrencies charge lower transaction fees, they are not governed by entities like governments and central banks plus they use peer-to-peer networks to transact.
When you send cryptocurrencies, there are a lot of processes within the network. For starters, the requested transaction is broadcasted to the P2P network where a network of nodes validates using known algorithms.
Once verified, your transaction will be combined with other transactions to create a block on the blockchain. The new block will be added to the blockchain permanently thus completing your transaction.
Once the transaction is complete, it cannot be reversed, it’s not forgeable and now it is part of the blockchain.