The use of cryptocurrency has significantly increased over the past decade, so the fact that it has a huge influence on financial activity in the world is hard to ignore. If you have no idea what cryptocurrency is, how it works, or why it’s used, we are ready to give you the answers. Let’s take a look at the basic terms and processes that make the crypto system work.
Defining the Term
A cryptocurrency is a digital currency that is based on cryptography — the study that uses mathematical techniques to secure information. Cryptography allows cryptocurrencies to not depend on banks or government systems of financial control that could estimate their value. A group of developers monitors and verifies all transactions, which are recorded using proof techniques of cryptography. Although financial authorities don’t regulate their rate, cryptocurrencies maintain some value. It will remain that way as long as people are willing to buy them and receive them as payment.
Crypto Transactions
If somebody holds cryptocurrency in an e-wallet, they can send payment to another person’s digital wallet. Since this payment is not managed by a central bank or any other state-controlled system, the transaction is conducted directly from person to person or “peer-to-peer,” making the process quicker and cheaper than fiat currency transactions.
At first, Bitcoin was just a fast and cheap means of transferring money. But after more people started using Bitcoin, demand increased, and its value immediately began to soar, making it a good trading asset. While banks use monetary policy to maintain control over fiat currencies, Bitcoin limits the number of coins to keep the value high.
Though Bitcoin is the first and most known currency, there is a whole group of “altcoins” (alternative digital currencies) that are also actively growing. Among the leading altcoins are Litecoin, Cardano, Ethereum, and Polkadot.
The Purpose of the Blockchain
When recorded, transactional data forms the blockchain, which serves as a database with the information of all transactions in the system that can be viewed publicly. Blockchain is much different from typical data storage in the way it records information. It forms blocks of data, and when the current block is full, it is chained to the previous one in chronological order.
Since security is crucial, the system is most effective at making hacking nearly impossible — if you try to change the data in one block, you influence the whole chain. On top of that, blockchain servers are spread across the globe and have no primary server.
Benefits of Mining
Mining is the process of producing the proof and allowing more coins to enter circulation. Any computer owner can collect and process information about the current operations with cryptocurrency. It is required in order to conduct transactions within the system.
The more miners and computer resources are available, the more secure and stable the system is. For information processing, miners receive a reward in the form of a mining fee set by the owner of virtual money. Transactions with the highest fee are conducted first; therefore, transactions with no mining fee can be processed for a long period of time.
Takeaway
The main point of cryptocurrencies may seem confusing at first, but, in fact, their basic idea is simple. Cryptocurrency systems provide an alternative to a central bank by putting the control of money in the currency holders’ hands. The principle of decentralization and the global server network guarantee that transactions will be fast and secure. In addition to that, since cryptocurrency is digital money, it can’t be counterfeited or damaged.
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