What is crypto currency?
Essentially it is a decentralised digital and encrypted currency transferred between peers then confirmed in an open-door ledger through a process called mining.
To understand how it works, you will need to take a look at the basic concepts. More specifically:
Ledgers:
All confirmed teansactions from the start of creation are stored in a public ledger. The owners of the coins are encrypted and the peer system uses other cryptographic methods to ensure the record keeping is legitimate. The ledger shows that the digital wallets can calculate an accurate and spendable balance. New transactions will only use coins that are currently owned by the spender will be used. Theses transactions are usually referred to as a block chain.
Transactions:
Simply put, a transfer of funds between two digital wallets. These are submitted to the public ledger where it then gets confirmation. When a purchase or trade is made; the wallet uses an encrypted electronic signature (cryptographic signature) to provide the proof in a mathematical format to show it is coming from the owner of the wallet. This process takes around ten minutes sometimes a little longer, while the miners mine (confirms and adds transactions to the ledger).
Mining:
This is the process that is used to confirm the transaction and adds them to the public ledger. To add a transaction to the ledger, a miner has to solve an ever increasing complex computation problem (it is like a mathematical problem).
The process of mining is open source so it can be confirmed by anyone.
The first to solve the problem adds a block of transactions to the ledger. The way transactions, blocks and the ledger work together ensures that not one individual can easily add or change the block at will. Once added all transactions that match are permanent and a small fee is processed to the miners wallet alongside newly created coins.
The mining process is what adds the value to the coins and is known as the proof-of-work system.
The Anatomy of Cryptocurrency
Although there can be exceptions to the rule, there are a number of factors (beyond the basics above) that make cryptocurrency so different from the financial systems of the past:
Adaptive Scaling: Adaptive scaling essentially means that cryptocurrencies are built with a number of measures to ensure that they will work well in both large or small scales.
Adaptive Scaling Example: Bitcoin is programmed to allow for one transaction block to be mined every ten minutes. The algorithm adjusts after every 2016 blocks (theoretically, that’s every two weeks) to get easier or harder based on how long it actually took for those 2016 blocks to be mined. So if it only took 13 days for the network to mine 2016 blocks, that means it’s too easy to mine, so the difficulty increases. However, if it takes 15 days for the network to mine 2016 blocks, that shows that it’s too hard to mind, so the difficulty decreases.
A number of other measures are included in digital coins to allow for adaptive scaling including limiting the supply overtime (to create scarcity) and reducing the reward for mining as more total coins are mined.
Cryptographic: Cryptocurrency uses a system of cryptography (AKA encryption) to control the creation of coins and to verify transactions.
Decentralized: Most currencies in circulation are controlled by a centralized government, and thus their creation can be regulated by a third party. Cryptocurrency’s creation and transactions are open source, controlled by code, and rely on “peer-to-peer” networks. There is no single entity that can affect the currency.
Digital: Traditional currency is defined by a physical object (USD representing gold for example), but cryptocurrency is all digital. Digital coins are stored in digital wallets and transferred digitally to other peoples’ digital wallets. No physical object ever exists.
Open Source: Cryptocurrencies are typically open source. That means that developers can create APIs without paying a fee and anyone can use or join the network.
Proof-of-work: Most cryptocurrencies use a proof-of-work system. A proof-of-work scheme uses a hard-to-compute but easy-to-verify computational puzzle to limit exploitation of cryptocurrency mining. Essentially, it’s like a really hard to solve “catpcha” that requires lots of computing power.
Pseudonymity: Owners of cryptocurrency keep their digital coins in an encrypted digital wallet. A coin-holder’s identification is stored in an encrypted address that they have control over – it is not attached to a person’s identity. The connection between you and your coins is pseudonymous rather than anonymous as ledgers are open to the public (and thus, the ledgers could be used to glean information about groups of individuals in the network).
Value: For something to be an effective currency, it has to have value. The US dollar used to represent actual gold. The gold was scarce and required work to mine and refine, so the scarcity and work gave the gold value. This, in turn, gave the US dollar value.
Cryptocurrency works with a similar concept. In cryptocurrency, “coins” (which are nothing more than publicly agreed on records of ownership) are generated or produced by “miners”. These miners are people who run programs on specialized hardware made specifically to solve proof-of-work puzzles. The work behind mining coins gives them value, while scarcity of coins and demand thereof causes their value to fluctuate. The idea of work giving value to currency is called a “proof-of-work” system. The other method for validating coins is called proof-of-stake. Value is also created when transactions are added to public ledgers as creating a verified “transaction block” takes work as well.
More info - cryptocurrencyfacts.com
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