Cryptocurrencies are just a medium of exchange, they are a way to carry out transactions digitally. They are digital currencies which are completely independent of government control or a central authority or a server. They are completely on their own. You may be wondering how this sort of system differs from Paytm, Google pay, Amazon pay or the digital banking app you have on your phone. They certainly appear to serve the same use on the surface – paying friends, making purchases from your favorite website – but under the hood, they couldn’t be more different.
What makes cryptocurrencies unique?
Cryptocurrencies are decentralized. There isn’t a central bank or subset of users that control it. The network participants (nodes) run software that connects them to other participants so that they can share information between themselves. A centralized system is used in banks. Users must communicate via the central server. Whereas, in a decentralized system, nodes are interconnected and relay information between themselves. This makes them highly resistant to shutdown or censorship. In cryptocurrency, the nodes keep a copy of the database. Everyone effectively acts as their own server. Individual nodes can go offline, but their peers will still be able to get information off of other nodes. Which makes them functional 24×7. They allow for the transfer of value anywhere around the globe without the intervention of intermediaries.
Who invented cryptocurrencies?
There have been many attempts at creating a digital currency during the 90s, systems like DigiCash, Beenz emerged in the markets but ultimately failed. Then, in 2009, an anonymous programmer or a group of programmers under a pseudonym “Satoshi Nakamoto” introduced Bitcoin. Satoshi described it as a ‘peer-to-peer electronic cash system.’ To this day, their true identity remains unknown. Other than Bitcoin there are few more: Litecoin (LTC), Ethereum (ETH), Zcash (ZEC), Dash, Ripple (XRP), Monero (XMR), etc. However, the features mentioned apply to all cryptocurrency.
How does it work?
Cryptocurrencies make extensive use of cryptographic techniques to secure transactions between users. The Public-key cryptography scheme is what users rely on to send and receive funds. Here, you have a public key and a private key, a private key is essentially a massive number that would beimpossible for anyone to guess. For Bitcoins, guessing a private key is as likely as correctly guessing the outcome of 256 coin tosses. As the name suggests, you need to keep your private key secret. From this key, you can generate a public key but vice-versa is not possible. The public one can safely be handed out to anyone for payment, you can also create digital signatures by signing data with your private key. One can say if the signature is valid or not just by comparing it with the public key. The private key is so important that losing your private key is the digital equivalent of throwing a bundle of cash into a trash incinerator! Literally no one can help you in recovering it. So, users store them in safe locations, generally called cryptocurrency wallets. It can be a specific device (a hardware wallet), an app on your PC or smartphone, or even a piece of paper.
Let‘s have a look at the mechanism of transaction:
Bitcoin consists of a network of peers, every peer has a record of the complete history of all transactions of every account. A transaction is a file that says, “X gives 10 Bitcoin to Y“ and is signed by X‘s(user) private key. It is basic public-key cryptography, nothing special. After it is signed, a transaction is broadcasted in the network, sent from one peer to every other peer. This is basic p2p-technology. The transaction is now immediately known by the whole network. But it gets confirmed after a specific amount of time. Confirmation is the most critical part of cryptocurrencies. You can say that cryptocurrencies are all about confirmation. As long as a transaction is unconfirmed, it will be pending and can be forged. When a transaction is confirmed, it is no longer forgeable, it can‘t be reversed, it is part of a permanent record of historical transactions: of the so-called blockchain. A blockchain is a special kind of database where data can only be added(and not removed or changed). Transactions are periodically added to a blockchain inside something we call blocks. Only miners can confirm transactions. This is their job in a cryptocurrency-network. They take transactions and stamp them as legit, then spread them in the network. After the transaction is confirmed by the miner, every node has to add it to its database. It has become part of the blockchain now. For this job, the miners get rewards(mostly in terms of Bitcoins), plus the transaction fees. Since the miner‘s activity is the most important part of the cryptocurrency-system we should take a deeper look at it.
What is cryptocurrency mining?
Principally everybody can be a miner. Since a decentralized network has no authority to delegate this task, a cryptocurrency needs some kind of mechanism to prevent it from being misused. Otherwise, the system would break immediately. So, Satoshi set the rule that: the miners need to invest some work of their computers to qualify for this task, i.e they need to have heavy equipment, private server farms and have to incur huge electricity bills. Using which they have to find a hash – a product of a cryptographic function – that connects the new block with its predecessor. This is called the Proof-of-work. In Bitcoins, it is based on the SHA 256 Hash algorithm.
SHA 256 is a kind of cryptographic puzzle which the miners compete to solve, they also have to be the first to solve it. After finding its solution, a miner can build a block and add it to the blockchain. As a reward, he is being awarded a specific number of Bitcoins. This is the only way to create valid and legal Bitcoins.So we can say mining is the method by which Bitcoins are produced. As time passes, more and more of Bitcoins are mined and so the reward is given to the miners reduces. For example, when Bitcoin was first created, the reward for every successful mining was 50 BTC. Now, the reward stands for 12.5 BTC, this happened because the Bitcoin network is designed such that there can only be a total of 21 million Bitcoins in circulation. Hence cryptocurrencies are built on cryptography. They are not secured with people or with trust, but by math!
Connections with the dark web!
Everything has drawbacks, and the one with cryptocurrencies is that the identities of the user is not disclosed. And this is what is needed in the black market! Then the entrepreneurial minds started running and they developed a digital way. Then the word came out that you could potentially buy drugs, weapons, prostitution, etc. using Bitcoin-based websites. Most famous of these was a website called Silk Road, founded in 2011 by Russ Ulbricht as a way for users to shop for anything illegal without being arrested until it was shut down in 2013. The reason behind this was that the details of the buyer and seller remained anonymous.
The market of cryptocurrencies is fast and wild. Nearly every day new cryptocurrencies emerge and old die. What the future of cryptocurrency will look like depends entirely on what people believe. Some believe that Bitcoin will rise to replace gold in the digital age and change the existing financial system. Others argue that cryptocurrencies will always be a secondary system. Cryptocurrencies will change the world. Step by step. You can either stand beside and observe, or you can become a part of history in the making. As said by Rick Falkvinge “Bitcoin will do to banks what email did to the postal industry.”
Note : Utmost care has been taken to credit the original authors/sources and to make these as apt as possible.