Cryptocurrencies, also known as cryptocurrencies or crypto, refer to any type of digital or virtual currency that uses cryptography to secure transactions. In the absence of a central issuing or regulatory authority, cryptocurrencies rely on a decentralized system to record transactions and issue new units.
Cryptocurrency is indeed a digital payment system that does not rely on banks for the verification of transactions. With this peer-to-peer payment system, anyone can send and receive money anywhere. These payments only exist as digital entries in an online database that describe specific transactions, rather than as physical money that is transported and exchanged in the real world. Transactions involving cryptocurrency funds are thus recorded in a ledger. Digital wallets are where cryptocurrencies are kept.
Note that the term “cryptocurrency” refers to the use of encryption to verify transactions. In other words, advanced encryption is required to store and transmit cryptocurrency data between wallets and ledgers. The purpose of encryption is to provide security and safety.
How Cryptocurrency Works
It is possible to use cryptocurrencies to buy everyday goods and services, but most people invest in cryptocurrencies in the same way they invest in stocks or precious metals. While cryptocurrencies are a new and exciting asset class, investing in them can be risky as you need to do extensive research to fully understand how each system works.
Transactions verified and recorded on a blockchain serve as cryptographic proof or a unit of measurement from one person to another without the help of a trusted third party.
Although bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging financially, with more applications expected in the future. This technology can be used to trade bonds, stocks and other financial assets.
Now let’s focus on blockchain technology. The latter is indeed an open and distributed ledger where transactions are stored in code. Specifically, it is like a checkbook spread across thousands of computers around the world. Each transaction is recorded in a “block”, which is then linked to a “chain” of previous cryptocurrency transactions.
It has been compared to a book where you write down everything you spend money on, each page is like a block, and the whole book is a collection of pages, in other words a “blockchain”.
So everyone who uses cryptocurrency has their own copy of this ledger with a blockchain to create a unified record of transactions. Each new transaction is recorded as it happens and each copy of the blockchain is updated with new information at the same time, ensuring that all records are identical and accurate. The Elrond for example (EGLD course) is a blockchain protocol that enables extraordinarily fast transactions through sharding.
To prevent fraud, each transaction is validated using a technique such as proof-of-work or proof-of-stake.
How to mine Bitcoin?
Bitcoin mining is the process of releasing new units of cryptocurrency into the world, usually in exchange for validating transactions. While the average person can theoretically mine cryptocurrencies, it becomes increasingly difficult in proof-of-work systems like Bitcoin.
Proof-of-work cryptocurrencies, on the other hand, require massive amounts of energy to mine. For example, Bitcoin mining currently consumes 127 terawatt hours (TWh) of electricity per year, which is more than Norway’s total annual electricity consumption.
While mining in a proof-of-work system is impractical for mere mortals, the proof-of-stake model requires less powerful computers because validators are randomly selected based on the amount of their stake. However, to participate, you must already own a cryptocurrency.
How do you use cryptocurrency?
While you can buy a variety of goods and services with crypto, especially Litecoin, Bitcoin or Ethereum, you can also use crypto as an alternative investment option to stocks and bonds.
Bitcoin, the best-known cryptocurrency, is a secure, decentralized currency that, like gold, has become a store of value. You can buy Bitcoin on the platform KuCoin.
Using cryptocurrencies to make secure purchases depends on what you are trying to buy.
That said, if you want to make a payment in cryptocurrency, you will most likely need a cryptocurrency wallet. A “hot wallet” is a type of wallet that interacts with the blockchain and allows users to send and receive their stored cryptocurrencies.
Therefore, keep in mind that transactions are not instantaneous as they must be validated by some mechanism.
Conclusion
Finally, crypto currencies are a type of decentralized digital currency based on blockchain technology. While you may be familiar with the most popular cryptocurrencies, namely Bitcoin and Ethereum, there are over 19,000 different cryptocurrencies in circulation.