Cryptocurrency Series: Part One

Cryptocurrency+Series%3A+Part+One

Photographs courtesy of losspreventionmedia.com

Cryptocurrency has been a hot topic since 2015. Based on current trends, that is not going to stop anytime soon. What are cryptocurrencies, and why are there so many of them? Are they safe? Do people really get crazy rich off of them? This article will be exploring those questions, the technology that supports cryptocurrencies, and how bitcoin works.

To understand cryptocurrency, it is important to understand the technology behind it. All cryptocurrencies are run on a technology called “Blockchain.” At its core, Blockchain is a public ledger using a decentralized database – data is stored on multiple computers within the network. Every record is linked to its previous record forming a sequence of blocks. Blockchain technology has been emerging for a while now – even making its way to the U.S elections voting system. However, what makes it effective to be used in cryptocurrency is its fundamental properties:

  • Data protection: By using a decentralized database (also known as Distributed ledger technology), every user collectively holds the control, rather than a single entity administering the data.
  • Consensus-based approach: When a transaction has occurred, a broadcast is sent to all the participants in the network. Those in the network must accept the transaction and confirm that its timestamp is legitimate to make the ledger entry or valid transaction.
  • Immutable transactions: When forming a chain, each block or transaction uses a unique hash generated by the previous block. This mode of linking one record to another with a cryptographic code along with decentralization makes it nearly impossible to manipulate a record.
  • Persistence: Once a record or transaction goes into the blockchain, it stays in there forever.

There are many cryptocurrencies in the market right now (Litecoin, Binance Coin, Ethereum, Ripple, Dogecoin, et cetera). Though the differences between them exist in matters such as transaction speed and supply of coins, they all follow the above principles of the blockchain at the core of their implementation. Look at how blockchain is used in Bitcoin, the very first and most popular cryptocurrency to date:

When a user first performs a bitcoin transaction, it goes into a pool of pending transactions waiting to be verified. This notifies all users in the bitcoin blockchain network. “Miners” then solve a cryptographic puzzle for this transaction in the pool, which generates “proof of work” that is used to verify whether or not the transaction is legitimate. If legitimate, the transaction gets added to the bitcoin blockchain (public ledger) and remains there forever. This way, bitcoin also negates the possibility of double-spending, or spending the same unit twice. In return, miners get bitcoins as a reward for their work.

If solving the cryptographic puzzles is enough to get bitcoin, should there be more bitcoins generated by the miners? These cryptographic puzzles are designed to get harder over time as the number of transactions in the blockchain increase. On top of this, the amount of bitcoins as a reward also reduces over time. In this manner, bitcoin regulates how many coins are generated into the world and keeps the whole system secure from fraud and counterfeit bitcoins.

Investing in cryptocurrency can be an exciting hobby or even a career for some. As with any investment involving capital, however, thorough knowledge and background research are required. Part two of the Cryptocurrency Series will explore how bitcoins can operate without the government backing them, why bitcoin has monetary value, and how its price is determined.