What is Cryptocurrency? How Does it Work?
Cryptocurrency is a virtual currency based on a blockchain - a decentralized, distributed network. It is an online medium of exchange & peer-to-peer version of electronic cash which records transactions on an electronic distributed ledger that is shared between a network of computers.
Bitcoin is the first cryptocurrency introduced by Satoshi Nakamoto through a whitepaper entitled, "Bitcoin: A peer-to-peer Electronic Cash System" He described the mechanism of Bitcoin, an electronic network system based on cryptographic proof instead of trust.
Therefore, it doesn’t require a trusted third-party such as a bank or middleman to conduct or control financial transactions.
This cryptography proof confirms the validity of transactions by validators connected to the nodes that keeps and maintains transaction records in the blockchain.
Each node keeps a record of every transaction on a copy of its own blockchain ledger. Each transaction is time stamped and is added to the already existed chain forming a block of the chain in a chronological order, that’s why it is called a blockchain.
Every cryptocurrency has its own blockchain while each token is created on top of the already existed blockchain.
Cryptocurrency can be used to make a secure online transfer of payments directly to the party without the involvement of a bank or solution payment company. Crypto wallets are required to send, receive and store cryptocurrencies. The wide use of cryptocurrency made it so popular such as buying and selling through cryptocurrency exchanges, donations, cross-border payments, online secure purchases, etc.
Currently, there are 8,532 cryptocurrencies have been listed on CoinmarketCap. The Crypto market is showing bullish trends with a total market cap of $1.738 trillion where Bitcoin has surpassed $57,257 price while the price movement trend continues to increase, at the time of writing.
How does blockchain work?
Blockchain is an electronic ledger comprised of a collection of immutable records that are connected and fault-tolerant duly protected by cryptography.
We know that crypto transactions are cryptographically secured. Cryptography refers to the hidden art of writing secret codes.
Every user in the blockchain network has two keys: a public key and a private key.
Public Key refers to the address of users on the network. It is just like an email ID and is publicly opened to everyone on the network. It is used to encrypt / lock data. Private Key is private. It can be used to decrypt / unlock data. Private Keys are used to redeem funds and to send funds.
We will explain with an example of a cryptocurrency transaction between two parties.
For example, George wants to send a Bitcoin to Diane. Lets see how does it happen with the blockchain?
George would use the public key that belongs to Diane’s address to encrypt the transaction which can only be decrypted by Diane using her private key.
George sends the Bitcoin to the wallet address of Diane. The transaction becomes encrypted using a hashing algorithm encryption and the private key of George. Now, the transaction is encrypted and digitally-signed which comes from George.
This transaction can only be decrypted / unlock by Diane using her private key.
Thus, George sent Bitcoin to Diane using his public key to encrypt the transaction which can only be decrypted by Diane’s private key.
This transaction is transmitted to a network of peer-to-peer computers distributed across the world. The network of computers confirms the validity of the transaction using an algorithm.
The transaction is validated and added to the block. This block is added to the already existed blocks in chronological order.
This transaction is complete.
The people who validate the transactions are known as miners. Miners solve the complex mathematical puzzle to verify the validity of the transaction. The miners who resolve the puzzle first, add the block to the blockchain, they are rewarded with the cryptocurrency.
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