What is cryptocurrency and how does it work

 What is cryptocurrency, how can encrypted digital currency be used? We will answer questions through a simple, easy and clear explanation about cryptocurrencies. Cryptocurrency or cryptocurrency is a form of digital money that is designed to be secure and, in many cases, anonymous from the sender and recipient (i.e., it is unknown who sent the money and to whom). It is a currency linked to the encrypted Internet (such as sending an encrypted email), the process of converting read information into an impenetrable code, and purchases and transfers cannot be tracked. Cryptography emerged with the need for secure communication in World War II. It has evolved in the digital age with elements of mathematical theory and computer science to become a way to secure communications, information and money online.

Before going into the in-depth explanation of what cryptocurrency is and how to use it, let's decrypt the name itself cryptocurrency. For the first time, the term cryptocurrency was used in the title of an article written by Andy Greenberg, editor of the American financial and analytical journal Forbes.

The concept of currency itself does not need to be interpreted, either the concept of encrypted, it means secret, encrypted or digitally encrypted or via symbols understood through a specific protocol. Basically, a cryptocurrency is a sequential series of cryptographic signatures related to each other, obtained as a result of solving cryptographic equations. Cryptography ensures that each currency is unique and valuable. To some extent, encrypted signatures can be likened to serial numbers on banknotes.

Before the Bitcoin cryptocurrency came into being, programmers were already trying to create virtual money. Of particular note is Nick Szabo's Bit Gold project. At the end of the last millennium, he came up with the idea of ​​enhancing the security of electronic payments using encryption.

You May Also like this: What is Bitcoin in simple and understandable terms

What is the cryptocurrency, in clear and simplified words

Cryptocurrency is digital money or, in other words, a means of payment for what can be bought, and now it has become a store of value, such as gold and silver, but in digital form with money. Unlike national currencies issued by state banks, cryptocurrency is only present on the “World Wide Web” and is never minted in the form of coins or printed in the form of banknotes, but no local currencies can be converted through services that support this.

Cryptocurrency is a very safe type of digital money. Blockchain technology is used to create and implement transfers between network users. All data about the cryptographic system is stored on several separate computers that are nodes of the network. All changes to the current state of the system are recorded and confirmed by each node.

Cryptocurrencies are created by performing cryptocurrency calculations, which, with the current level of computer technology, completely exclude the possibility of fraud, hacking or modification in them. In some countries (Germany and Venezuela) cryptocurrency is equivalent to national financial instruments, and each virtual currency has its own price against the US dollar and other traditional currencies. The exchange of virtual tokens of different networks with each other for Fiat Money is carried out on special online platforms.

The first cryptocurrency that helped in the emergence of the term (cryptocurrency) was the Bitcoin currency , which was invented in 2009 by an unknown person under the name Satoshi Nakamoto, and Bitcoin is the most popular and highly valued currency in the crypto market. There has been a proliferation of other cryptocurrencies in the last decade, now there are more than 2000 cryptocurrencies available on the Internet, which are altcoins or AltCoins.

You May Also Like This: What is blockchain technology simple and easy explanation

The technical component of the cryptocurrency

Traditional cryptocurrencies are completely decentralized, that is, they do not have a single governing body and are not regulated externally by financial institutions. We'll talk about exceptions to this rule shortly.

All information about the cryptocurrency is stored in the distributed ledger built with Blockchain technology. Anyone can view data on financial transactions and portfolio balances. Each new block contains records of completed transactions, commission fees and other service information. The process of creating new blocks is called digital mining, that is, decoding a block mathematically and using computer resources.

Anyone can participate in cryptocurrency mining, provided they have strong computing equipment and a stable communication channel with the global currency network: how's that all the details on this topic -

The user must have special skills in order to be able to create a mining farm to work with a specific cipher network via a remote server.

Cryptocurrency security

The protection of cryptocurrency information is guaranteed by a complex encryption code that is always linked to another encrypted code. Most blockchain systems use Proof of Work (PoW) to protect against misuse of the blockchain system. Digitized prospectors, transaction processing and creation of new blocks ensure the network works and get rewarded for it using cryptocurrencies.

New blocks are created in the chain in a strictly defined period of time. Its duration is included in the program code for each system. Each new block is linked with the previous block in one chain and its hash signature must be validated by all network nodes i.e. the two metals. Incorrect blocks are eliminated and cannot affect system functionality. The hash sequence and digital signature ensure that every transaction is unique and secure.

Types of cryptocurrencies

According to CoinMarketCap and as of writing this post (take the correct number here), there are around 8,000 different cryptocurrencies. The total market value of virtual cryptocurrency digital assets is $ 560 billion (the number always fluctuates see Egypt), a large proportion of that amount represented by the 20 largest blockchain projects. A relatively large portion of currencies are used to pay for services in a particular network, they are not sold on exchanges, and are not of value to investors.

All cryptocurrencies can be divided into the following types:

• Cryptocurrencies for payment or electronic payment system currencies: They are intended to pay for goods and services and can act as an investment. They are completely decentralized, anonymous, and easy to use. The most famous of these cryptocurrencies is Bitcoin.

• Crypto tokens for the blockchain internal system: They are financial tools that users of networks designed to develop and implement smart contracts cannot do without. A smart contract is a program that automatically controls the transfer of assets between two or more parties to an agreement under pre-defined terms. The most popular cryptocurrency platform is Ethereum. In addition to its main purpose, ETH is used as electronic money along with Bitcoin. People are investing in the Ethereum network infrastructure, and they are confident that they are not investing in a marketing trap, but are increasing their capital by contributing to the development of innovative projects.

• Cryptocurrencies for trading platforms and other platforms for various services: It provides a unique token that has an important value within the system, such as the BNB currency, the currency of the Binance platform, which if you pay the trading fees in that currency, it will be given special discounts. Reputable crypto exchanges issue their own digital currency. Thus, the management is working to accelerate the turnover of funds and increase the liquidity of unknown assets in its trading floor. Users can at any time sell the cryptocurrency in exchange for an exchange token, with minimal service fees, which significantly reduces the risk of investing in small projects. Cryptocurrency exchanges are completely centralized networks, which is the main difference between them and traditional cryptocurrencies.

• Utility tokens: Also called app currencies. Released in limited volume via the ICO process. After completing a fund-raising campaign for the project, Blockchain project teams sometimes try to promote it as an investment option. But this practice is now strictly regulated by the US Securities and Exchange Commission, so for a successful investment you must be an expert in the field of economics.

• Security tokens: the latter are directly identical to a stock. It is distributed among the investors to enhance the financial security of the investments. A security token is a type of digital token that every contributor receives. On the basis of cryptocurrencies, dividend payments are distributed, and they themselves can be invested in other projects. The STO owner's right is recorded in a smart contract, and the tokens themselves are sold on the trading platforms. STO turnover is controlled by financial regulators such as the US Securities and Exchange Commission (SEC) or the Swiss Financial Markets Authority (FINMA).

• Crypto Commodities: The generic name for an asset traded or exchanged in the real or virtual world, which can be obtained through the blockchain using exclusive digital tokens. Cryptocurrency tokens are used to pay for hosting on a remote server, media content, and other goods and services within a specific platform. For example, Aeron Blockchain cryptocurrencies can be used to pay for access to an air travel security database. The self-regulation and execution of financial transactions in Crypto Commodities are included in the program code in the form of a smart contract. Unlike platform currencies, cryptocurrency tokens are never used as regular money outside of the project.

• Stablecoin: These are the cryptocurrencies that are less volatile, because their value is always tied to a physical asset. The firm that issued the stablecoins must have an amount in paper funds, for example, in US dollars, in the balance of the reserve fund in order to guarantee the value of the token. The most popular currency of this type is Tether or USDT, but there are other stable currencies supported by the dollar and the euro.

• Venezuelan government cryptocurrency El Petro: It is the first stable government-owned currency issued by the Venezuelan government. It is secured by the country's oil and mineral resources. State structures in the People's Republic of China and Russia are working on similar projects. All stablecoins have one clear drawback, the central mechanism for maintaining the exchange rate is clearly in conflict with the decentralized nature of cryptocurrencies. Preparations are underway to switch to digital currency in China. Cryptocurrency development began in 2014, and in May of this year, the People's Bank of China introduced the National Cryptocurrency (DCEP) in four regions of the country as part of a pilot project to transfer the main money supply to the blockchain network.

Now you have a general understanding of the term cryptocurrency, what it is and how to make money. But a completely logical question arises: "Why is there a need at all?" Let's try to find out and answer it.

For what did the encrypted digital currency appear?

The decentralized peer-to-peer systems are fully transparent and credible and are not subject to external oversight. If you explain what cryptocurrency is in simple terms, you can say this: "It is a suitable alternative to bank transfers." The distributed ledger system does not require middlemen, which greatly simplifies business and financial transactions. The records in the blockchain cannot be accidentally or intentionally destroyed or forged. Cryptocurrencies can also be used as a means of capital accumulation. First of all, Bitcoin is suitable for this, which many experts now call digital gold.

In fact, the entire central financial system works on trust in third parties and has many weaknesses and many direct fraud often occurs through it. In 2008, the bankruptcy of four banks led to the collapse of the global economy and this was a terrifying issue that led to a massive recession in the economy for years. But there will be no similar effect on the decentralized cryptocurrency system, as one or even ten nodes withdrew from the network, and nothing will be affected and the network will remain stable as you see it now, although many participants enter and exit in documenting transactions without having We feel any change.

How does the cryptocurrency differ from regular fiat currencies such as the dollar and the euro

In the next paragraph, we talk about the main differences between virtual crypto money and regular money.

Cryptocurrencies have a decentralized system that is controlled by mathematics: A blockchain network consists of a group of programs for mining and storing cryptocurrency. Each local wallet is a complete host and contains the entire system database. To access records of blockchain transactions, you do not need to open a wallet or register online to view the information.

Lack of outside middlemen and regulators: Nobody will shut down or freeze a blockchain wallet. If there are restrictions on issuing cryptocurrencies in the program code for a particular cryptocurrency, then more cryptocurrencies cannot be created if desired. Fund transfer fees are not high and do not depend on the distance or jurisdiction of the recipient. All completed transactions are irreversible.

Anonymity. At the wallet's creator, do not locate your passport information anywhere. The wallet address is available, but the last name of the owner cannot be found. The exceptions are deposits from cryptocurrency exchanges that work with both cryptocurrencies and fiat currencies, and because they are centralized, they require identity verification, but with a fully decentralized cryptocurrency wallet, you can have a completely anonymous wallet. The address The cryptocurrency wallet consists of upper and lower case letters in English, and numbers, and you can find them abbreviated in the QR code.

System Support Bonus. Every user with sufficient funds to purchase enough computer equipment and skills to set up can participate in cryptocurrency mining. The participants in the process are called digital miners. They scan the transactions, write them into the next block and calculate their cryptographic signature. After signing the next block, a new block is formed on the basis of its decision. The complete block set is one chain, with each subsequent segment being a continuation of the previous segment, which is ensured by cryptographic calculations. All invalid transactions and blocks generated by them are canceled by the system, ensuring the integrity of the blockchain architecture.

High degree of protection. The computing power of the popular Blockchain systems is measured in Petahesh and Iksahish, which exceed the capabilities of all modern supercomputers. Attempting to gain partial control over it will cost cyber criminals billions of dollars, and there is no guarantee that the scam will succeed.

Why is cryptocurrency so popular

Despite the uncertain legal situation, virtual money is in demand in many countries. Primarily due to its versatility and ease of calculation. Earning a mining cryptocurrency is an expensive and complicated process, but everyone can create a wallet and buy digital currencies in the exchanges.

Clients greatly appreciate the beneficial properties of Blockchain networks: the anonymity, constancy, and total lack of control in terms of how powerful they are. E-wallets encrypted with the private key are extremely secure. Therefore, many are investing in cryptocurrencies in hopes of higher prices against the US dollar and the euro.

Prospects for the development of the cryptocurrency market

It is extremely difficult to completely ban cryptocurrencies, but politicians are not in a hurry to recognize them as money. At best, they are recognized as securities to facilitate taxation.

Lately, the government cryptocurrency release might sound like a joke. But when China, after Venezuela, announced the upcoming transition to cryptocurrency and Russia and the European Union began to seriously consider cryptocurrencies, the situation became somewhat clearer. The greats of this world want to use all the beneficial properties of Blockchain assets, and eliminate all the inappropriate properties. For this purpose, a mixture of cryptocurrencies and fiat currencies is created. This money cannot be rigged and its circulation can be easily controlled, but we are not talking about decentralization and anonymity.

Let's see what happens. Meanwhile, miners are making money creating blocks, while traders wait for the volatility, and the rest of the cryptocurrency holders await the next price jump. We are still at the beginning of the path, studying practically what cryptocurrency is and how to use it. But blockchain technologies are ubiquitous in all areas of life, meaning that a full transition to virtual money is only a matter of time.

The pros and cons of cryptocurrencies

Our topic on what a cryptocurrency is, would be incomplete if we did not address, in addition to the advantages of cryptocurrencies, its shortcomings. Much has already been said about the advantages of cryptocurrency, so we'll limit ourselves to a shortlist.

• Decentralization.
• Anonymity.
• Persistence.
• Transparency.
• Reliability.
• Comfortable to use.

Well, now let's add tar to honey for cryptocurrencies

Traditional cryptocurrencies are not backed by anything. It really resembles gold, silver and other valuable resources. After all, in reality, the value of gold is determined by supply and demand. Someone exchanged several thousand bitcoins for pizza, while others exchanged gold for glass beads and considered it a very good deal. The liquidity of paper money is guaranteed by the government and the central bank. The liquidity of the cryptocurrency depends on many factors.

Cryptocurrencies are volatile, and their price is subject to rapid fluctuations that could lead to massive market crashes in less than 5 minutes.

Losing your private key to your wallet equates to losing money. If the hacker identifies the code due to your negligence, they will simply withdraw the funds to their wallet. But if you lose access yourself, it won't be any easier. Nobody will get those cryptocurrencies, and the wallet team will not be able to help you with that because it is out of their control due to decentralization.

The cryptocurrency is a valuable commodity only within the system that created it. And if the Blockchain project itself has not achieved popularity among users, or for some reason has lost the value of the application, then its in-house tokens become a meaningless and worthless digital token. If the owners of the computing equipment can switch to mining another digital currency, then the investors simply lose their investment.

If all developed countries decide to ban or control traditional cryptocurrencies, that will be difficult. Digital money will go into the dark and become a way to pay for the dark web, with all the consequences for that.

You May Also Like This: What is Bitcoin mining, how is it done, and what devices are mining it

How cryptocurrency works

Cryptocurrencies use decentralized technology to allow users to make secure payments and store funds without having to use their name or go to banks to make transfers. The cryptocurrency operates on a distributed public ledger called the blockchain, which is a record of all transactions that have been updated and held by currency holders since the inception of that currency.

Cryptocurrency units are created through a process called mining, which involves using the power of a computer to solve complex mathematical problems that generate Bitcoin value that is worth the money. Users can also buy currencies from brokers or buy them with PayPal, for example, (the buyer of the cryptocurrency is not the metal of the currency, but the owner of the currency, either the metal of the currency is the one that documents the transfers that the owner makes to the cryptocurrency), also the exchange and storage of the currency will be on a cryptocurrency wallet The basis of its main software is the blockchain (for example, when Bitcoin first appeared, it was necessary to download and install the program on computers connected to the Internet ... now there are wallets on the Internet for the cryptocurrency).

Cryptocurrency and the applications of blockchain technology are still in their first childish generation in financial terms, and the revolution that this technology brings about we expect a lot because of it in the currency industry, local and encrypted digital. Blockchain technology will enable us to trade transactions including bonds, stocks and other financial assets using technology. (Coding everything - a topic based on (coding assets))

Why use cryptocurrency digital currency

Cryptocurrency is known to be safe and provides a level of anonymity. Transactions cannot be synchronized, reversed, or falsified, as the cryptocurrency to convert also does not require high fees, even if you will entrust it to the farthest place in the world (even to the moon if there is an Internet connection between the earth and the moon), which makes it more reliable than traditional currency. And its decentralized nature means that it is available to everyone, and no party can control or monitor it (even governments). Also, opening a cryptocurrency account does not need a central bank.

As a new form of money, and what is traded in the cryptocurrency market, investing a small amount now can reach a large amount during tomorrow and vice versa. But the same thing works the other way. People looking to invest in cryptocurrencies should be aware of market volatility and the risks they take when buying.

Because of the level of anonymity provided by the cryptocurrency blockchain, the cryptocurrency blockchain is often associated with illegal activities, especially on the dark web. Users should be careful when choosing to buy coins.

What are the most popular cryptocurrency?

• Of the Bitcoin of Bitcoin : Bitcoin currency encrypted digital first and most traded so far. The coin was developed by (Satoshi Nakamoto in 2009, a personality or organization, an unknown institution) who developed the blockchain for it. Its market value was about $ 93 billion as of late 2017.

• Bitcoin Cash : the currency split from the original Bitcoin in August 2017, and it is a currency that contributed to the acceleration of transactions and transfers in deciphering the block code for the whole (Bitcoin and Bitcoin Cash). Its price has reached 800 dollars in the past months, while its market value so far has reached More than 5 billion dollars.

• Ethereum : Founded in 2015, ETH is the currency token used in the Ethereum blockchain, the second valuable cryptocurrency. Ethereum has a market cap of about $ 29 billion as of late 2017. However, Ethereum has had a turbulent journey. After a major breakthrough in 2016, it split into two currencies, while in recent months its value reached $ 1,300.

• Ripple : is another distributed book of bonds system that was founded in 2012. Ripple can be used to track more types of transactions, not just cryptocurrencies. It has been used by banks including Santander and UBS and has a market value of more than $ 8 billion.

• Litecoin : This currency is most similar to Bitcoin, but has rapidly moved in value and developed new innovations, including payments and rapid transfer operations for many transactions. The total value of Litecoin reached about $ 3 billion in late 2017.

We hope that we have touched on this topic about what is a cryptocurrency in a way that satisfies your curiosity.