What is Cryptocurrency?

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Cryptocurrency is still a mysterious electronic cash system and can be viewed as a byproduct resulting from the invention of Bitcoin by a group of anonymous programmer known as Satoshi Nakamoto in 2009.  Besides, cryptocurrency can also be defined as an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions. On the other hand, blockchain technology serves as an unlimited public database upon which cryptocurrency derive transparency, decentralization, and immutability.

Cryptocurrency is a concept that resembles a peer-to-peer network typology of office files sharing system. According to Satoshi, bitcoin was to serve as the only ‘peer-to-peer electronic cash system.’ However, after some time, it was realized that it was possible to create similar but unique monetary units using blockchain technology. This led to the invention of the so-called altcoin. Thus cryptocurrency is Bitcoin combined with its derivative altcoins such as litecoin, ethereum, ripple, Bitcoincash among others.

Therefore, cryptocurrency can as well be termed as virtual currency designed to function as a medium of exchange. Some of the features that make cryptocurrency qualifies as a currency include decentralization, immutability, and transparency. Besides, it is intended to solve a financial problem such as double-spending, frauds, and proper record keeping. Primarily, cryptocurrencies transactions are recorded on are permanently recorded on a public ledger that cannot be altered unless users verify specific conditions.

The 3 Fundamentals of Cryptocurrency

a) Blockchain

 Blockchain is simply a public and decentralized ledger of chronological records of all sorts of cryptocurrencies transactions. This system encrypts the identity of coin owners, thus proving the transaction legitimacy upon validation by both users. The blockchain ledger keeps on growing in size due to new records of transaction that are marked as ‘completed’ blocks then join the chain in a chronological manner, in simple words blockchain is a register that keeps track of records of digital currency transaction without third parties such as banks or government institutions.

Blockchain transactions are permanently recorded in a manner that they cannot be tampered with. It is impossible to alter or reverse any record that occurs on blockchain because of hashing technology that encrypts all the transactions. Hashing is a sophisticated process that generates

All users on the blockchain are identified by their public keys to hide their identity. Only the digital address is identified together with the corresponding units, but the real user names are kept hidden. The application of cryptography enhances relative anonymity between participants. It said to be relative because in instances where the public key of a user is known on can trace the history of transaction records.   

b) Transactions

 A transaction is the transfer of virtual currency ownership between the digital wallet of a seller and that of a buyer. It entails the buyer and seller striking an agreement, then the buyer submitting a payment followed by confirmation and validation of the exchange through a mathematical proof of ownership transfer. Transaction validation normally a maximum of ten minutes for bitcoin and can be faster for other coins such as Litecoin.

c) Mining

Mining is a process of generating or minting cryptocurrencies. It involves the process that confirms and validates coin being added to the blockchain. The process entails solving a complex mathematical puzzle. The mining process occurs openly; think of it as several people all over the world working on their computers trying to solve the question, and the coin goes to the one who solves it first.  Then the additional coin is added to the blockchain permanently; a new block is created specifically for this coin where all its transactions will be recorded. A small fee is charged on the coin formed, and that is what people refer to as a proof-of-work system.

Characteristics of cryptocurrencies.

  • Exists virtually – this implies that they are imaginable and do not exist in physical form. They are operated on mobile devices; none of the cryptocurrency creators have come up with a tangible coin. 
  • Operate on a decentralized system– It implies that the transactions occur independently without the involvement of trusted third parties such as banks or control authority like the government agencies. This is the main reason behind the creation of cryptocurrency, and it was to eliminate third parties in monetary transactions and their interferences.
  • Irreversible transactions – Unlike for the traditional currencies where you can return purchased goods and get your money back, once a cryptocurrency transaction permanent and users cannot reverse the process once it has been verified. This is why it is important to think about your financial decisions carefully and to use a trustworthy platform for your trades. 
  • Hacker proof – Cryptography technique used on Block chain ledger ensures that the traders are protected from hackers and thieves. Each party has to receive a confirmation message and validate the transaction before it takes place. This eliminates issues of sending money to the wrong person or sending the wrong amount of money.
  • Anonymity-This implies that transaction happens between unknown people through the use of public and private keys. The trader’s identities are fully protected and concealed. Since they are not operating with a bank account, details are not that crucial. Several people have argued that this characteristic will encourage illegal transactions; however, this is one of the main reasons that people like cryptocurrency since users’ financial privacy is protected.
  • Limited supply– The net worth of Bitcoin and all other cryptocurrencies accrued to about $100 billion implies that they are of a fixed amount. You must have heard that the coins are mined and it is kind of a scramble and partition exercise, or that the number of the Bitcoins that are yet to be mined very is scarce. Yes, cryptocurrency creators only come up with a fixed number of coins, and once each is allocated to an owner, the mining process ends. 
  • Universality– Cryptocurrencies can be used on a global basis since it is not limited to any specific country boulders or territory like the fiat currencies such as dollar in United States or euro in European countries.  The coin is globally accepted globally, and its users do not have to keep worrying about exchange rates and currency depreciation.

About the author, Declan Yin

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