If you been following the news recently, you might have heard of a word bitcoin being lobbed around. Cryptocurrencies have gained significant coverage due BitCoin’s rise in value where one coin is worth over $7,000. This has created a gold rush like fever for cryptocurrencies in the recent months. But the vast majority of people do not understand what cryptocurrencies are and let alone how they work. In this article, I will explain this emerging monetary system and the potential impact this new technology can have in the world.
To understand how cryptocurrencies works one has to first look at the purpose money plays in our lives. When you go down to its core, money is a method of accounting used to measure who owns what and who owns to who. Traditionally, money is issued by a central institution like a bank or government to keep track of the value of money, circulation, debt and more. This central agency acts as a middleman to make sure that money maintains its integrity.
What are Cryptocurrencies
Cryptocurrency are a digital currency that employs cryptography for its management and security. Like regular money, it also serves as an accounting system. However, unlike regular currencies, cryptocurrencies do not have central issuing authorities or regulatory body. Cryptocurrencies are kept on a digital wallet and can be transferred between users online through a peer-2-peer network. The digital assets can be acquired by purchasing them through a crypto exchange, as payment for goods and services, or through mining.
How is it Kept Secured?
Before you get your hands on any cryptocurrency, you first have to create a wallet where you store them. These wallets are unique to the user who created it, and it cannot be replicated thanks to the use of public key encryption. Public key encryption uses a unique private key for which only the user has access to, and a public key that anyone can see. The private key is used to sign every transaction which is then verified by using the public key. This verification process is kept by a series of online ledgers known as the blockchain.
Since cryptocurrencies do not have a central regulatory entity, you are probably wondering who keeps track transactions like payments and transfers. Transactions are overseen by a number of online ledgers known as the blockchain. Every time somebody makes a transaction, it is recorded in the online ledgers. These online ledgers verify the person who initiates the transaction, the recipient, and the time of the exchange. The online ledgers resolve these transactions by solving complicated cryptographic hash functions.
To resolve these functions a good amount of computer processing power is needed. So where are these ledgers hosted and who provides the processing power? Users around the world volunteer to maintain these ledgers and resolve the hash functions. Volunteers do not do this out of the kindness of their hearts though. Every time a hash function is resolved, they generate a small amount of Bitcoin which is added to their account. This process is referred to as mining.
Businesses, consumers, and even governments are dependent on banks in one way or another to maintain the integrity of the monetary system. However, cryptocurrencies and blockchain technologies have the potential of changing the status quo. Given that the blockchain is in a way self-sufficient, the need for an intermediary to handle transaction will no longer be necessary. This means less fee’s to process monetary operations, transparency, and inability to manipulate currencies.