Cryptocurrency is a digital currency that utilizes encryption to create and manage the currency. But what does that mean?
Definition of crypto
Cryptocurrency is a digital currency that utilizes encryption to create and manage the currency. Cryptocurrency isn’t printed, like the U.S. dollar or euro; it isn’t backed by any kind of government or central bank, and it doesn’t have any physical form to speak of. Instead, cryptocurrency tokens exist as entries on a public ledger stored on many computers across the world, called blockchain technology.
The idea for cryptocurrency was first introduced in 2008 by Satoshi Nakamoto (pseudonym), who published a paper describing cryptocurrency and how it works (this paper is considered the foundational document for Bitcoin). For transactions to be legitimate, they need to be confirmed through cryptography which helps secure online transactions. This means that each transaction is recorded publicly so it’s very difficult to copy bitcoins, make fake ones or spend ones you don’t own. It also enables other uses like smart contracts which are an agreement between two parties that can be partially or fully executed or enforced without human interaction.
There are three main types of cryptocurrency
There are three main types of cryptocurrency: Transactional, Utility and Platforms.
Transactional Cryptocurrencies like Bitcoin, Litecoin and Dash can be used as a secure medium for transacting value between individuals. They are also ideal for transferring money through the internet in a way that does not involve banks.
Utility tokens like Golem and Siacoin allow users to access network resources on the blockchain. For example, Golem is a world supercomputer that users can access by buying GNT tokens on their platform. Other examples include Lisk which runs apps on its own blockchain system, Factom which secures data stored on its blockchain by hashing it into an immutable ledger entry on Bitcoin and Stratis which provides services to corporations wanting to leverage blockchain applications.
Platforms like Ethereum are similar to Utility tokens in that they offer something more than just being a method of payment. However, Platform coins differ in that developers can use them to build their own decentralized applications (dApps). These dApps run smart contracts – pieces of code written into the blockchain – which execute when certain conditions are met without any need for intermediaries or third parties.
How does cryptocurrency work?
The cryptocurrency network is not controlled by a single, central authority. Instead, it is a peer-to-peer network, where all users have equal access to the transaction history of the currency and can use their computational power to verify and record new transactions. The verification process ensures that only valid transactions can be added to the common ledger and prevents manipulation (e.g., double spending) of the cryptocurrency units. The decentralized nature makes cryptocurrencies less vulnerable to attacks than traditional financial systems, but it also makes them slower at processing transactions as every participant in the network must come to an agreement on every change made in the history of that currency.
Transactions and crypto
a transaction is simply a transfer of value between Bitcoin wallets that gets included in the blockchain. Bitcoin wallets keep a secret piece of data called a private key or seed, which is used to sign transactions, providing mathematical proof that they have come from the owner of the wallet. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and usually begin to be confirmed by the network in the following 10 minutes, through a process called mining.
A transaction can also have multiple outputs, allowing one to make multiple payments in one go. Each output must refer to at least one previous unspent output in the blockchain. In this case output is called change and needs to be returned back into your own wallet through another transaction (which requires another address and thus another public/private key pair).
Crypto mining explained
Crypto mining is a method of verifying transactions in a blockchain. The miners verify the transactions by solving complicated mathematical problems and adding them to the block. These miners are rewarded with cryptocurrencies for solving these mathematical problems.
The miner’s job entails confirming the transactions and ensuring that there is no double-spending. A miner will select pending transactions on the blockchain ledger, verify them to ensure that they are valid, and then add them to a new block.
Blockchain technology can be useful
Blockchain is a distributed database that maintains an ever-growing list of ordered records, called blocks. Each block contains a timestamp and a link to the previous block. The blockchain can be used for recording transactions between two parties efficiently and in a verifiable and permanent way.
Future of crypto?
The first thing to keep in mind is that cryptocurrencies are still in their infancy. This means it can be a bit of a wild west at times. Think about the early days of the internet. There was no Facebook or Twitter, just niche chat rooms and forums run by hobbyists who were trying to figure out how this whole internet thing works. That's what cryptocurrency feels like right now—the web back in 1993, before there was even an Amazon or a Google.
But with time comes maturity, and while it may take years for the cryptocurrency markets to settle (or perhaps they never will), one thing is certain: cryptocurrencies are here to stay and they're going to change the world. They are gradually becoming more mature and as they do so, their impact on society will become more profound.
Cryptocurrencies have the potential to make money faster, cheaper, safer, and smarter than ever before. The way we move money could fundamentally change for good if cryptocurrencies live up to their potential; whether that happens sooner or later remains to be seen but it's certainly going to happen eventually—even Bitcoin haters have been forced into accepting this fact (including Jamie Dimon).
Forks in crypto
Hard forks are when a blockchain splits into two different blockchains. There's no real difference between the two chains before they split, but after they split, they have different rules. The most famous hard fork was Bitcoin Cash in 2017, which created a separate cryptocurrency from Bitcoin.
Soft forks are similar to hard forks, except that soft forks don't create new cryptocurrencies. Instead, soft forks just update older versions of cryptocurrency protocols so that newer versions and older versions of the protocol can still be part of the same blockchain.
A 51% attack is when an attacker controls 51% (or more) of the mining power on a given blockchain network and uses that power to control the network for their own gain. If an attacker can control more than half of the mining power on a network, they get to mine all the blocks and then decide which transactions to include in those blocks so that they can spend money twice or reverse other people's transactions (so it looks like they never made them). This kind of attack is possible because someone who owns half or more of a coin's supply could use their coins to create fake accounts and mine with them (the process by which new coins are created).
As with other currencies, the price of crypto is determined by demand and supply. When demand for crypto increases, its price may also increase. However, since crypto is not regulated by a central bank. There is no obligation to ensure that the currency has sufficient value to be an acceptable means of exchange in all circumstances. Additionally, unlike some traditional currencies backed by assets such as gold or legal tender recognized by governments as having monetary value, cryptocurrency is not backed by any assets or government regulation. In addition, cryptocurrencies are not insured by the FDIC and they may not be used to make payments at merchants that accept traditional currencies.