Cryptocurrency – The Ultimate Knowledge Base
What is Cryptocurrency?
Cryptocurrency is a geeky, technical, and misunderstood term. However, significant organisations, banks, and companies are aware of their importance. In this day and time, it is difficult to find any organisation that has not invested time and money into Cryptocurrencies. Cryptocurrency is the digital currency of the future. It is decentralised and safe. However, there is more to Cryptocurrencies than just these basics.
How did cryptocurrency originate?
Cryptocurrency did not originate as a currency, but rather as a side product of another invention, the Peer to Peer Electronic Cash System. Satoshi Nakamoto, the inventor of Bitcoin, intended to save double spending by utilising a peer-to-peer network. This network has no central authority.
How does the peer-to-peer network work?
Realising digital cash means requiring a payment network with accounts, balances, and transaction details. The major problem faced here is that these networks have to prevent one entity from spending the same amount twice. A central server records all balances, thus preventing the entities from spending the same amount of money twice.
The peer-to-peer network built by Satoshi solved the centralisation of balances by making the system decentralised. In the peer-peer network, every peer needs to maintain a list of all transactions. All peers check if the future transactions taking place are valid or an attempt to double spend. If any peer disagrees, transactions are broken.
What exactly are Cryptocurrencies?
Cryptocurrencies are nothing but limited entries in a database that cannot be changed until and unless specific conditions are met.
The money in your bank account too is just an entry in the database. The entry can only be changed under specific conditions. If the condition of you physically owning the coins and notes is met, then the amount in your database is decreased. Hence, money is just a verified entry in databases. A central database handles transactions of your money.
Cryptocurrencies are similar to the money you own, except the fact that there is no central database to keep track of the Cryptocurrency you own. The database is accessed, shared, and maintained by all servers in the network. Cryptocurrency transactions are hence handled in a decentralised manner.
What is blockchain?
Blockchain is the technology used by Cryptocurrencies to keep a decentralised track of all transactions. A blockchain is essentially a list of records called blocks, linked using cryptography. Each block in the blockchain system consists of a cryptographic hash of the previous block, the transaction data, and a timestamp.
In essence, blockchain is resistant to modification of data. Once a block is verified, it is irreversible and permanent. The blockchain system does not have a central authority but is shared with an immutable ledger. Hence, everything built on the blockchain is transparent, and everyone involved is accountable for their actions.
Example bitcoin transaction using blockchain technology
Let us take a look an example bitcoin transaction:
1. Bitcoin Cryptocurrency comprises of a network of peers.
2. Each peer maintains a complete history of all the transactions and the balance of every account.
3. Let us assume a transaction where A gives X Bitcoin to B. A transaction file is created denoting this transaction and is signed by A’s private key. This is basic public key cryptography.
4. After the transaction file is signed, it is broadcasted in the network and sent from one peer to the other. This is basic p2p-technology.
5. The whole network immediately knows about the transaction.
6. The transaction has to be confirmed for the process to be complete. Confirmation is critical in Cryptocurrencies. As long as the transaction is unconfirmed, it can be forged and is incomplete.
7. Only miners confirm transactions. Anyone can be a miner. However, miners need to invest some work in their computers.
8. To confirm transactions, miners have to find the SHA 256 Hash that connects a new block with its predecessor.
9. After finding the solution, the miner builds a block and adds it to the blockchain. Doing so rewards the miner a specific number of Bitcoins.
10. Since the difficulty of finding the hash increases the amount of computer power invested by the miner, only a certain amount of Cryptocurrency token can be created at a given time. This ensures that forged transactions do not take place.
What are the revolutionary properties of cryptocurrencies?
What makes Cryptocurrencies revolutionary? Why are Cryptocurrencies in such hype these days? There are some properties of Cryptocurrencies that make them extremely reliable, secure, and different than other forms of money.
Cryptocurrencies are secured not by people, but by math. There are more chances of you being hit by lightning, than the chances of your Bitcoin address being compromised. Listed below are the transactional and monetary properties of Cryptocurrencies:
Fast and global
Cryptocurrency transactions are propagated instantly in the network and are confirmed fast. Since peers are located all around the world, Cryptocurrencies are also global.
Cryptocurrencies are locked by a public key cryptography system and are secured not by people but by maths. Big numbers and strong cryptography makes it impossible to break Cryptocurrency.
Once a transaction is confirmed, you cannot reverse it. It is important to understand that sending your funds accidentally to a hacker or scammer is also set to stone, and you cannot reverse the transaction.
It is not possible to connect Cryptocurrencies, which are random chains of characters, to real-world identities.
Using Cryptocurrency is permissionless. You can download the Cryptocurrency software for free, receive, and send Cryptocurrencies without asking for permission from any central authority.
Cryptocurrency supplies are limited. The schedule written in the code limits the supply of tokens. The monetary supply of a Cryptocurrency in the future can be calculated in the present day and time.
The money in your bank account is created by debt. However, Cryptocurrencies do not represent debts but rather just represent themselves. Cryptocurrency is as solid as coins of gold.
Some well-known Cryptocurrencies include:
• STK Token
• Mycelium Token
• Insanity Coin
• Bitcoin Cash