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| What is cryptocurrency and how does it work? |
What are cryptocurrencies?
A cryptocurrency is a type of digital currency created through a system of codes. Cryptocurrencies function independently, outside of traditional banking and government systems.
They use cryptography to secure transactions and regulate the creation of additional units. Bitcoin, the first cryptocurrency ever created and certainly the best known, was launched in January 2009. Today there are over 1,000 cryptocurrencies available online.
Cryptocurrencies are very different from traditional fiat currencies. Nevertheless, you can buy and sell them just like any other asset. You can also trade on the price movements of various cryptocurrencies through CFDs.
Cryptocurrencies are also called digital currencies, alternative currencies or virtual currencies. Initially, they were created with the purpose of providing an alternative payment method for online transactions. However, not many businesses and consumers are using them yet, and in any case, they are currently too volatile to be considered suitable payment methods. As a decentralized currency, cryptocurrency was developed to be untethered from any government oversight or influence; instead, the cryptocurrency economy is controlled by a peer-to-peer internet protocol. The individual units that make up a cryptocurrency are strings of encrypted data that have been encoded to represent a unit.
Bitcoin is considered the first decentralized cryptocurrency. Like all cryptocurrencies, it is controlled through a blockchain transaction database, which functions as a distributed public ledger. Bitcoin was created by Satoshi Nakamoto - but it is not known whether this name refers to a single person or a group.
One characteristic of most cryptocurrencies is that they are designed to slowly reduce production. As a result, only a limited number of units of the currency will be in circulation. This is reminiscent of commodities, such as gold or other precious metals. For example, the number of bitcoins is not expected to exceed 21 million. Cryptocurrencies like ethereum, on the other hand, work slightly differently. Issuance is limited to 18 million ethereum tokens per year, which is 25% of the initial stock. Limiting the number of bitcoins causes them to become "scarce," which turns into value. Some argue that the creator of bitcoins actually modeled cryptocurrency on precious metals. As a result, mining becomes increasingly difficult as the reward is halved in intervals of a few years until it reaches zero.
Main features of cryptocurrencies
There are certain principles that govern the use, exchange and transactions of cryptocurrencies.
Cryptography
Cryptocurrencies use advanced cryptography in a number of ways. Cryptography was born out of the need to find secure methods of communication during World War II in order to convert easily readable information into encrypted codes. Since then, modern cryptography has evolved a great deal, and in today's digital world it relies primarily on computer science and mathematical theory. It also draws on communication science, physics, and electrical engineering.
There are two main elements of cryptography that apply to cryptocurrencies: hashing and digital signatures.
Hashing verifies the integrity of data, maintains the structure of the blockchain, and encrypts account addresses and people's transactions. It also generates those cryptographic puzzles that make it possible to extract a blockchain.
Digital signatures allow a person to prove possession of part of encrypted information, without revealing that information. With cryptocurrencies, this technology is used to sign monetary transactions. This shows the network that an account holder has consented to the transaction.
Blockchain Technology
A blockchain is the decentralized public ledger or transaction list of cryptocurrencies. Complete blocks, which include the most recent transactions, are recorded and added to the blockchain. They are kept in chronological order as open, permanent, and verifiable records. A peer-to-peer network of market participants manages the blockchains and follows a precise protocol to validate new blocks. Each "node" or computer connected to the network automatically downloads a copy of the blockchain. This allows everyone to keep track of transactions without having to record data centrally.
Blockchain technology creates a record that cannot be changed without the consent of the rest of the network participants. The concept of blockchain is attributed to the founder of bitcoin, Satoshi Nakamoto. This concept has also inspired other applications beyond money and digital currencies.
Block mining
Block mining is the process of merging new transactions into a blockchain in the form of blocks. In this process - if we are talking about bitcoin, for example - new bitcoins are produced, adding to the total number of coins in circulation. Mining requires special software that is used to solve mathematical puzzles, and this validates legitimate transactions that form blocks. These blocks are added to the public ledger (blockchain) every 10 minutes or so. When the software solves the transactions, the "miner" is rewarded with a precise number of bitcoins. The faster the miner's hardware processes the math problem, the more likely the transaction is to be validated and rewarded in bitcoin.
The main cryptocurrencies
Bitcoin
Bitcoin is considered the first cryptocurrency ever created, and it is also the best known. Satoshi Nakamoto, a person or group of people under this name, created bitcoin in 2009. Its characteristics probably resemble those of commodities more than those of traditional currencies. This is reflected in the fact that bitcoin is now used more as a form of investment than as a method of payment. As of December 2017, there were approximately 16.7 million bitcoins in circulation (there may be up to a maximum of 21 million). Traders can either buy bitcoin through an exchange or speculate on its price movements with CFDs. Learn more about bitcoin or bitcoin trading.
Ethereum
Ethereum is a relatively new cryptocurrency. It was launched in 2015 and is presently the second largest digital currency.. It works similarly to the bitcoin network, allowing people to send and receive tokens that represent a specific value across an open network. The tokens are called "ether" and are used as payment in the network. The primary use of ethereum, however, is to act as a smart contract rather than a form of payment. Smart contracts are codes that can be used in the ethereum bockchain. Ethereum's limit is also slightly different from that of bitcoin. Issuance is limited to 18 million ethers per year, or 25% of the initial stock. So while the absolute issuance is fixed, the relative inflation decreases each year. Learn more about ethereum.
Litecoin
Litecoin is one of the many cryptocurrencies born out of bitcoin. At the end of 2011, it "forked over" from the bitcoin ledger. Charlie Lee, the creator of litecoin, wanted it to be a faster version of bitcoin, with faster individual transaction times. He also increased the maximum number of coins available: the total number of litecoins is 84 million, while the total number of bitcoins is 21 million. Learn more about litecoin.
Summary
Bitcoins and other cryptocurrencies can be described as potential currencies. As noted earlier, they are not currently accepted by many as a medium of exchange. They present significant limitations that do not allow them to become true currencies. In addition, there are those who also question whether cryptocurrencies are simply part of a financial bubble. It is possible, but unlikely, that they will be used more as a medium of exchange in the future. The potential uses of the blockchain technology behind cryptocurrencies are also a matter of interest. It is possible that this technology could be adopted for other purposes, including legal transactions, security programs, and election systems.
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