Cryptocurrencies have taken the world by storm and are threatening to spearhead the next industrial revolution. Backed by revolutionary blockchain technology, digital currencies are already having a ripple effect on various sectors, from health to retail as well finance.
What is a cryptocurrency?
A cryptocurrency is a digital form of money created from a computer code and running on a peer-to-peer network, often referred to as a blockchain. Cryptocurrencies differ from fiat currencies as no centralized authority regulates their use. The decentralized nature means there is no single authority in control of cryptocurrencies on a blockchain network.
How Cryptocurrencies Work
Cryptocurrencies work a lot like a bank credit or debit card. In this case, there is a ledger held on blockchain whereby all transactions are made public for everyone to see. The ledger is made up of a list of entries that nobody can change without full filling certain conditions. The ledger is decentralized which means no one owns it, leaving it to be self-run and self-governed.
While the ledger maintains a list of all the transactions, people are able to send virtual coins to each other, using a software dubbed cryptocurrency wallet. To transfer any funds through the blockchain network, one must have a password often referred to as a private key.
Each transaction made on the blockchain network is encrypted before being broadcast on the cryptocurrency network. All transactions upon verification are added on a public ledger in a process called mining. Any person running a copy of a software dubbed ‘full node’ can access the content of the ledger but cannot alter its content, let alone see the person who sent the amounts.
Cryptocurrency mining is the process by which new cryptocurrency coins are created and added into a peer-to-peer network. The mining process involves the solving of complex cryptographic puzzles using supercomputers. Each correct answer to a puzzle entitles one to a reward in the form of a cryptocurrency as stipulated by the network.
Bitcoin is one of the major cryptocurrencies in which new coins are added to the network through mining. However, other coins, such as Ripple, cannot be mined. Instead, the backers behind the cryptocurrencies release new coins to the market from time to time.
Irreversible: Once a cryptocurrency transaction is confirmed on a network, it cannot be reversed under any circumstance. What this means is that once the money is sent, there is no provision of reversing the transaction unless the recipient agrees to refund the money.
Pseudonymous: Cryptocurrency transactions are not tied to real-world identities. What this means is that it is impossible to know the identity of the people sending and receiving money on the blockchain network. People send and receive money through addresses that are chains of about 30 characters.
Fast Transactions: Cryptocurrencies enable fast and real-time transactions as they occur in a global network that is under no one’s control. The lack of a third party to authorize transactions, ensures fast transactions.
Secure: The use of cryptography ensures high levels of security with regards to the sending and receiving of cryptocurrencies. Only a person with a private key can send cryptocurrencies in a wallet.
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