Call it Digital Money; Call it Electronic Cash – its Cryptocurrency
WHAT IS CRYPTOCURRENCY?
Cryptocurrency is generally regarded as a digital or electronic money. Only few people know that Cryptocurrency emerged as a side product of another invention, the unknown inventor of Bitcoin, Satoshi Nakamoto the first and most important cryptocurrency never intended to invent a currency. He announced Bitcoin late 2008 that he developed a “peer-to-peer electronic cash system” , the most important part of this invention was that he has found a way to build digital cash in the process. The missing piece he found to realize digital cash gave birth to cryptocurrency. After so many failed attempts to create digital money in the nineties.This is why its kind of technical and complex to understand but if you get the concepts, you will be able to know more about cryptocurrencies. As Bitcoin is the mother and most important cryptocurrency i will make it my “focus” coin. Although, there quite lots of cryptocurrencies day by day but all perform closely the same as Bitcoin.
What is really Cryptocurrency?
“Cryptocurrency is a digital money created from code and encrypted string of data or a hash that is encoded to signify one unit of currency which is free of all governmental oversight and monitored by a peer to peer internet protocol”
To invent digital cash. Or digtal money you need a payment network with accounts, balances, and transaction. That‘s easy to understand Right? Ok One major problem every payment network has to solve is to prevent that one entity spends the same amount twice, (Double Spending). This is Usually done by a central server who keeps record about the balances.
In a decentralized network, you don‘t have this kind server. So you need peer in the network to have a list with all transactions to check if future transactions are valid or an attempt to double spend.
But how can these entities keep a consensus about this records?
If the peers of the network disagree about only one single, minor balance, everything is broken. They need an absolute consensus. Usually, you take, again, a central authority to declare the correct state of balances. But how can you achieve consensus without a central authority?
Nobody did know until Satoshi emerged out of nowhere. In fact, nobody believed it was even possible.
Satoshi proved it was. His major innovation was to achieve consensus without a central authority. Cryptocurrencies are a part of this solution – the part that made the solution thrilling, fascinating and helped it to roll over the world.
If you take away all the noise around cryptocurrencies and reduce it to a simple definition, you find it to be just limited entries in a database no one can change without fulfilling specific conditions. This may seem ordinary, but, believe it or not: this is exactly how you can define a currency.
Take the money on your bank account: What is it more than entries in a database that can only be changed under specific conditions? You can even take physical coins and notes: What are they else than limited entries in a public physical database that can only be changed if you match the condition than you physically own the coins and notes? Money is all about a verified entry in some kind of database of accounts, balances, and transactions.
How miners create coins and confirm transactions
Let‘s have a look at the mechanism ruling the databases of cryptocurrencies. A cryptocurrency like Bitcoin consists of a network of peers. Every peer has a record of the complete history of all transactions and thus of the balance of every account.
A transaction is a file that says, “Tim gives X Bitcoin to Tom“ and is signed by Tim’s private key. It‘s basic public key cryptography, nothing special at all. After signed, a transaction is broadcasted in the network, sent from one peer to every other peer. This is basic p2p-technology. Nothing special at all, again.
The transaction is known almost immediately by the whole network. But only after a specific amount of time it gets confirmed.
Confirmation is a critical concept in cryptocurrencies. You could say that cryptocurrencies are all about confirmation.
As long as a transaction is unconfirmed, it is pending and can be forged. When a transaction is confirmed, it is set in stone. It is no longer forgeable, it can‘t be reversed, it is part of an immutable record of historical transactions: of the so-called blockchain.
Only miners can confirm transactions. This is their job in a cryptocurrency-network. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain.
For this job, the miners get rewarded with a token of the cryptocurrency, for example with Bitcoins. Since the miner‘s activity is the single most important part of cryptocurrency-system we should stay for a moment and take a deeper look on it.
Cryptocurrency Transactional properties
1.) Irreversible: After confirmation, a transaction can‘t be reversed. By nobody. And nobody means nobody. Not you, not your bank, not the president of the United States, not Satoshi, not your miner. Nobody. If you send money, you send it. Period. No one can help you, if you sent your funds to a scammer or if a hacker stole them from your computer. There is no safety net.
2.) Pseudonymous: Neither transactions nor accounts are connected to real world identities. You receive Bitcoins on so-called addresses, which are randomly seeming chains of around 30 characters. While it is usually possible to analyze the transaction flow, it is not necessarily possible to connect the real world identity of users with those addresses.
3.) Fast and global: Transaction are propagated nearly instantly in the network and are confirmed in a couple of minutes. Since they happen in a global network of computers they are completely indifferent of your physical location. It doesn‘t matter if I send Bitcoin to my neighbor or to someone on the other side of the world.
Address is a code alphabets used to send and receive or store cryptocurrencies, these addresses consists of letter and numbers up to 26-35. you can also refers Addresses as public key, wallet key and they are free provided by Wallet Providers. This is what you give the sender in other to receive currency from them.
Example: ” 1McQxqFXouq8uUV3aFFY5XVCFcnp9DfewY “
4.) Secure: Cryptocurrency funds are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrency. Strong cryptography and the magic of big numbers makes it impossible to break this scheme. A Bitcoin address is more secure than Fort Knox.
5.) Permissionless: You don‘t have to ask anybody to use cryptocurrency. It‘s just a software that everybody can download for free. After you installed it, you can receive and send Bitcoins or other cryptocurrencies. No one can prevent you. There is no gatekeeper.
1.) Controlled supply: Most cryptocurrencies limit the supply of the tokens. In Bitcoin, the supply decreases in time and will reach its final number somewhere in around 2140. All cryptocurrencies control the supply of the token by a schedule written in the code. This means the monetary supply of a cryptocurrency in every given moment in the future can roughly be calculated today. There is no surprise.
2.) No debt but bearer: The Fiat-money on your bank account is created by debt, and the numbers, you see on your ledger represent nothing but debts. It‘s a system of IOU. Cryptocurrencies don‘t represent debts. They just represent themselves. They are money as hard as coins of gold.
To understand the revolutionary impact of cryptocurrencies you need to consider both properties. Bitcoin as a permissionless, irreversible and pseudonymous means of payment is an attack on the control of banks and governments over the monetary transactions of their citizens. You can‘t hinder someone to use Bitcoin, you can‘t prohibit someone to accept a payment, you can‘t undo a transaction.
As money with a limited, controlled supply that is not changeable by a government, a bank or any other central institution, cryptocurrencies attack the scope of the monetary policy. They take away the control central banks take on inflation or deflation by manipulating the monetary supply.
NB: Cryptorcurrencies are like car that you really don’t know how it works to use… However having a basic knowledge how it started and what cryptocurrency really is, is essential, Hope you’ve learn more about cryptocurrency and how it works, if you have any more suggestion and or addition you can use the comment box below.