By now pretty much everyone has heard of crypto. Despite the popularity, few people have even the vaguest sense of what the word means. This blog will be oriented towards making the concept a little more clear. We will start off with a short overview and then discuss the various characteristics of cryptocurrency.
In short, crypto is a digital asset designed to work as a medium of exchange. Unlike traditional currencies issued by governments, cryptocurrencies are not usually controlled by a central banking or government authority. Instead, they rely on cryptography and distributed ledger technology (blockchain) to help with their transactions.
Demystifying Cryptocurrencies
Digital Currency: Cryptocurrencies exist solely in the digital realm. They do not require any physical coins or bills associated with them. Units of ownership are recorded electronically on a blockchain network.
Medium of Exchange: While not yet universally accepted by merchants, cryptocurrencies can be used to facilitate online transactions and payments. Their use as a payment method is steadily growing, with some businesses accepting them for in-store purchases as well.
Decentralized Network: Cryptocurrencies operate on a decentralized network, meaning there is generally no single entity controlling their issuance or management. This decentralization, in principle, aims to eliminate dependence on traditional financial institutions and potentially provide greater control to users over their money. Users hold their cryptocurrencies in digital wallets, which can, for example, be software applications on their devices. Transactions are broadcast across the peer-to-peer network, and validation is typically handled by miners or validators depending on the specific blockchain protocol.
Cryptographic Security: Cryptography plays a vital role in securing cryptocurrencies. Transactions are encrypted, making them harder to tamper with and more difficult to counterfeit. Additionally, once a transaction is recorded on the blockchain, it is very difficult for it to be altered or deleted. Since, every block in a blockchain refers to the hash on the previous block. A hash function transforms pieces of information into more secure form. Any alteration to the data within the block will result in a completely different hash. Therefore, we have a certain informational chain in every block chain.
Various Cryptocurrencies
The cryptocurrency landscape is growing literally day-by-day, with thousands of unique projects vying for attention. Here is a glimpse into two prominent categories:
Bitcoin (BTC): The pioneer and most well-known cryptocurrency, Bitcoin is generally considered to have the most potential. It has a limited supply, 19 million as of April 4th 2024, programmed into its protocol, and is primarily used as a store of value, similar to gold. Bitcoins value has experienced significant appreciation over the years, though it is volatile but potentially lucrative investment for some.
Altcoins (Alternative Coins): A diverse array of cryptocurrencies beyond Bitcoin are known as altcoins. These altcoins offer a wider range of functionalities and purposes. Some aim to improve upon Bitcoins scalability or transaction speeds, while others focus on specific applications within the blockchain ecosystem. Examples include:
Smart Contract Platforms: Blockchains like Ethereum allow for the creation and execution of smart contracts – self-executing contracts with pre-programmed terms. This opens up a vast array of possibilities, such as facilitating secure and transparent escrow services or enabling the development of Decentralized Applications (DApps).
Decentralized Finance (DeFi): DeFi utilizes blockchain technology to create a new, permissionless financial system, potentially disrupting traditional financial intermediaries. DeFi protocols allow users to borrow, lend, and trade cryptocurrencies seemingly without relying on centralized institutions.
The Mechanics of Crypto Transactions
Initiating a Transaction: When a user wants to send crypto to another user, they broadcast a transaction to the network. This transaction includes details like the sender, receiver, and amount of crypto being sent. The user will need a crypto wallet to initiate the transaction, signing it with their private key to authorize the transfer.
Mining/Validation: Miners (specialized computers) or validators (depending on the blockchain protocol) verify the legitimacy of the transaction. This process often involves complex cryptographic calculations to ensure the transaction is valid and follows the rules of the specific blockchain network. In Proof-of-Work (PoW) systems, miners compete to solve these complex puzzles, and the first miner to do so gets to add the block containing the verified transactions to the blockchain and earn a block reward. Other validation mechanisms, such as Proof-of-Stake (PoS), are being explored to address the energy consumption concerns associated with PoW.
Adding to the Blockchain: Once a transaction is validated, it is added to a new block on the blockchain ledger. This block is then cryptographically linked to the previous block, creating a potentially immutable chain of records.
Updating the Ledger: All participants on the network update their copies of the blockchain with the new block, ensuring everyone has a synchronized record of all transactions. This distributed ledger system seemingly eliminates the need for a central authority to verify and record transactions.
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