How does Cryptocurrency ACTUALLY work?
What is Cryptocurrency? What does it do and how does it work? Mrwhosetheboss breaks it all down nice and simple with easy step-by-step, from where it started to where it's going.
What is a Cryptocurrency?
A cryptocurrency is a digital currency that uses cryptography as a means of security. Most cryptocurrencies operate without the need for a central authority like a bank or government and operate instead through a distributed ledger to spread power among their community. A cryptocurrency has a set, defined monetary policy, whether it be a fixed limit of tokens or allowing the creation of new tokens based on predetermined rules.
How does it work?
The distributed ledger that holds cryptocurrency transactions is known as a blockchain. A blockchain consists of blocks, which hold individual transaction information. This information is timestamped and posted to the ledger so that each transaction can be verified by other blockchain stakeholders and never be altered. In order to conduct a transaction on the blockchain, users agree to pay a small fee, which helps maintain the security of the blockchain itself.
Let’s say you want to send your friend a small amount of Bitcoin. You create a transaction using your Bitcoin wallet and request to send Bitcoin to your friend’s wallet, agreeing to pay a nominal transaction fee along the way. After you make the transaction request, your transaction gets grouped with other transactions into a block on the Bitcoin blockchain. This block is verified by miners and posted to the blockchain, making the transaction complete.
Through this process, you can send cryptocurrency to anyone, anywhere around the world, with low transaction fees. Want to send $1 million Ethereum to your family in Brazil? Go right ahead! Not only will the transaction usually be completed in a matter of seconds or minutes, but it will also only cost you a fraction of the fee you would have paid using a traditional money transfer service.
What is a cryptocurrency used for?
One of the early appeals of cryptocurrency was that it offers you the opportunity to transfer large amounts of your wealth anonymously without any government or institutional interference. These days, cryptocurrency is used by some owners to take care of routine matters such as paying bills. Others use it as collateral to obtain online loans.
Still, others put their digital currency to use by investing in business start-ups. The combination of innovative tech ventures and cryptocurrency seems like a natural fit. You can also use your digital currency to travel the world. Arrive at your destination in the luxury vehicle you purchased with your cryptocurrency or on the airline that readily accepted your Bitcoin.
What is cryptocurrency mining?
Cryptocurrency mining refers to the reward gained from verifying transactions on a blockchain. Blockchain transactions are encrypted when added to a block. Therefore, these transactions need to be verified for accuracy before the blockchain can continue adding transactions to the next block. This is where miners come in. Miners use their computing power to solve complex mathematical problems to verify transactions in a block on the blockchain. The first miner to solve the problem and verify all of the transactions in a block is rewarded with a fee for their services. This method of securing a blockchain is known as proof of work (POW).
Think you are ready to earn cryptocurrency by mining? Don’t fire up your laptop just yet. These days, it takes specialized and expensive computer hardware to mine quickly enough to solve the puzzle before other miners and receive a cryptocurrency reward. In fact, entire businesses are created to mine cryptocurrency and profit from the rewards.
What might the future hold for cryptocurrency?
Is cryptocurrency going to continue growing? No one really knows the answer for sure. Still, you can rest assured that as long as there are use cases for cryptocurrencies and these assets provide an improvement over fiat currencies, they will hold a place in the global economy.
First, cashless and mobile payments will continue to grow globally, helping in cryptocurrency adoption and usage. Cryptocurrencies, like Bitcoin, will see their technology advance and use cases grow, leading more and more merchants to accept cryptocurrencies as a form of payment. Utility tokens will undergo their own battle to convince regulators they are not securities, while stable coins will prove that you can have cheaper, faster transactions using cryptocurrency rather than fiat.
The main issue with cryptocurrencies is their ease of use. Today, it still requires some level of technical understanding to utilize cryptocurrencies to their fullest potential. As more projects and developers work on user interface and design, cryptocurrency offerings will become easier to use for the average person with little to no technical knowledge. Once this happens, watch out, because there will be no limit to how high cryptocurrencies can grow.