What is cryptocurrency
Cryptocurrency is digital money, of which there is no fiat analogue. Crypto-currency differs from other electronic currencies in that it is protected and encrypted using special cryptographic algorithms. The main feature of the cryptocurrency is its decentralization, independence from a single control center.
No bank, government agency or private organization can manage cryptocurrencies and influence the transactions made within the system, because the data on the processes is stored on many devices simultaneously. This information cannot be tampered with or altered at will by one person, which means that cryptocurrency is protected from digital fraudsters.
All these features are provided by blockchain technology, the principles of which the cryptocurrency operates on. Blockchain is a distributed network whose nodes are not controlled by a single center and form an autonomous system for storing information.
All devices that join the chain receive a file with all the data ever recorded on this network. The stored information forms blocks that are publicly viewable but not subject to reverse modification.
How cryptocurrency works
Let’s look at the principle by which cryptocurrency emerges and operates, using bitcoin as an example. The author of the most popular crypto is considered to be a certain Satoshi Nakamoto, who can equally well be one person or a group of people. The concept of new payment system, which provides anonymity of participants, high security and autonomy Satoshi presented in 2008.
How does the cryptocurrency work? The bitcoin network is based on a blockchain and consists of blocks of transactions combined into a chain. Each such block contains data about previous blocks, thus the whole system is connected into a network and secures information within it. Data about transactions and actions in the network are anonymized, which ensures the anonymity of cryptocurrency holders.
The creation of new blocks and the recording of information in them takes place thanks to the technical capacity of the participants of the system – the process is called mining. Those who participate in the formation and generation of new blocks are rewarded in the form of cryptocurrency. It is not possible to create blocks and new bitcoins indefinitely, the limit is 21 million units.
Features of Cryptocurrencies
Cryptocurrencies are a new kind of digital money, which has long been in use and is actively used in electronic payments. What are the characteristics of such digital currency?
Adaptive scaling. There are a number of rules for cryptocurrencies that ensure their normal functioning at different scales. For example, the bitcoin mining algorithm is adjusted depending on the number of blocks mined in a certain time. Provisions are made to limit the supply time under certain conditions, as well as to reduce the reward for mining (when the volume of mining is greatly increased).
Cryptography. Cryptocurrencies use a special data encryption system, thanks to which the number of coins created can be kept under control, as well as transactions in the exchange and settlement.
Decentralization. Fiat money is created by certain authorities, and the systems of such currencies are controlled from a single center. Cryptocurrencies, on the other hand, rely on peer-to-peer networks, eliminating the ability to influence the blockchain from a single point.
Digital nature. Cryptocurrency does not exist in physical form, it is purely digital. Yes, crypto can be exchanged for goods or other types of money (dollars, euros, webmoney), but the digital currency itself exists only on the network.
Proof of performance. The bulk of cryptocurrencies operate on a proof-of-work system. It is a formula, a kind of captcha, for the confirmation of which certain computing power is needed.
Anonymity. Cryptocurrency wallets are encrypted, the owners get access to them by special identifiers, which are in no way connected with the person and the real data of the person. Transaction information is in the public domain, but the data is anonymized and does not lead to the owner of the cryptocurrency.
Value. The price of a cryptocurrency is determined by the amount of work it takes to mine the tokens, the scarcity and demand for coins can change this value. This variant of determining the price is called a proof-of-work system. There is also a version of proof-of-work for coins based on proof of ownership (proof-of-stake).