Cryptocurrency has gained an awful lot of traction (and press) in the past few years. Many people are excited about what it means for the financial industry, others are uninterested, and a lot of us are just plain confused! So what is it, and what makes it something that you should keep on your radar? Is it simply the newest craze, sure to die out quickly? Or is cryptocurrency the wave of the future?
Global economies are fast becoming digital. Old-fashioned paper-based systems are being replaced by technologies which are more accurate and secure, and provide many time-saving solutions for both businesses and customers. Cryptocurrency is part of this cutting-edge digital payment sector. It is defined as a medium of exchange which works much the same as regular currencies, but within the digital realm.
If you consider using your debit card or a system like PayPal, cryptocurrency is much the same: the numbers on your screen during transactions just represent cryptocurrency as opposed to a fiat currency like dollars or pounds. You don’t really need to fully understand how it works to use cryptocurrency, either; after all, there’s no need to completely understand your country’s monetary system to use your bank card. All you really need to do is to set up a Coinbase account, and then start to buy, sell, store, and receive Bitcoin and other cryptocurrencies like Ether and Litecoin.
Remember how we compared cryptocurrency to a bank card? Both of these systems involve the distribution of currency, the recording of transactions, balances, and the ability to send and receive currency digitally. Each of these online structures are set up to allow the user to arrange their balances and manage their accounts. The difference here is that instead of the government issuing the currencies and documenting ledgers, it’s an algorithm.
If you want to really try to understand this new kind of currency, the first concept to try to understand is blockchain. This is a distributed ledger which is enforced by a network of diverse computers. This sounds complicated, but really blockchain simply means a chain of blocks. The digital information is the “block,” and the public database is the “chain” and the former is stored in the latter. The “blocks” contain information about your purchases, like date, time, and amount paid, the participants of a transaction (where the consumer remains anonymous), and information which distinguishes that particular block from its fellows. One block on the chain can store up to 1 MB of data, which means that each block can store thousands of transactions.
Blockchains, by design, are intrinsically resistant to data modification. Once the information is recorded in a block (or continually expanding list of records), it cannot be altered without the entire chain being changed, which means a collusion of the entire network. A defining feature, therefore, and what makes cryptocurrency so appealing, is that it is theoretically immune to government interference, and it is not issued by a central authority.
When you do a transaction using cryptocurrency, the ledger stored in the blockchain allows the information stored within to be sent out to all users which host a copy of the blockchain. So your balances and transactions are shared digitally, and then users called miners work with software to help them unravel the “puzzle” contained within these blocks so that they can add a block of transactions to the ledger. The miner who cracks the code first is rewarded with a few coins, as well as transaction fees paid by those who created the transactions in the first place.
The algorithm mentioned above comes into play here; it relies on consensus, so if most of the miners are submitting the same transaction data to the block, there is confirmation that the information is accurate. Confirmation is critical: if a transaction is unconfirmed, it can be forged. Once confirmed, however, a transaction is fixed. After confirmation, there is no longer any chance it can be reversed or forged. And miners are the key to ensuring this security, and accurately recording information to the blockchain. Their job in cryptocurrency systems is the most important.
You may be wondering how safe cryptocurrency is to use. Its security relies on cryptography, which means that the data contained within each block is connected to the data in the last block in the chain with codes called hashes. These are one-way codes which make tampering with the entire blockchain extremely complicated. The difficulty of the miners’ job in solving these cryptographic puzzles and then meticulously recording the data digitally helps to ensure safety, as well. Not many people can really understand and apply such specialized knowledge!
The advent of cryptocurrency is really exciting in terms of what it can offer to the consumer. Sending money abroad is easy without large international fees. Service providers can ease their worries about payment fraud or checks that bounce, because cryptocurrencies force the client to spend only what is available in their balance.
And prices of cryptocurrencies compare well when compared to fiat currencies: although not controlled and regulated by a government authority, or accepted in most regions as legal tender, they do retain a fixed supply. This means that inflation and the ensuing devaluation of money is almost nonexistent with cryptocurrencies.
Still confused? That’s OK. This is a complicated and evolving area of digital currency, and it is confusing. There are some videos which may help here, and here. Don’t give up. Each new piece of information about this method, whether it is an article like this one, visual data like a video or graph, or simply sitting down with a technologically adept friend, you will soon begin to grasp a better understanding of this digital currency and how it can benefit you personally.
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