The basics of cryptocurrency that you need to know
Cryptocurrency is the financial buzzword of the 21st century. Just watch the news and you’ll hear many stories on these digital currencies most notably, Bitcoin and Ethereum, arguably two of the most well-known cryptocurrencies that are being traded.
There’s a lot more to cryptocurrencies than the glitzy stories of overnight wealth amassed by individuals. But how does the technology work?
We got curious so we decided to do some research into the world of cryptocurrency and did some digging on the technology. Here is cryptocurrency for you. Decrypted.
Where did cryptocurrency begin?
In October 2008, a certain Satoshi Nakamoto published a paper entitled ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, to create a digital cash system that was not governed by a central authority. In January 2009, the first cryptocurrency, Bitcoin, was released (somewhat quietly) to the public.
Now, there are over 1,000 different cryptocurrencies that are either publicly available for trading or created for specific purposes.
Why is it called cryptocurrency?
Cryptocurrency combines digital money with cryptography, the practice and techniques for secure and secret communication. Therefore, financial transactions and exchanges which are secured with high-level cryptography are referred to as cryptocurrency.
How does cryptocurrency work?
Cryptocurrencies are exchanged on a decentralised network made of computers from all around the world. In fact, recent estimations suggest there are now more than 1.65 million computers harvesting cryptocurrencies! All cryptocurrency transactions are recorded on a public ledger called the Blockchain.
This makes cryptocurrency vastly different from conventional transactions, all of which are governed by a central authority.
If you send $10 to your friend John, that $10 gets deducted from your account and then gets transferred into John’s account. The reason for this is because the bank (the central authority) keeps track of your transactions so that you cannot use the same $10 to send to John again.
In the cryptocurrency world, if you sent $10 to John, that transaction is verified in a vast peer-to-peer network of computers that solve complex calculations (cryptography) to verify your transaction.
If cryptocurrency only exists digitally, how do you store it?
The first thing to do is to get an e-wallet that specifically stores cryptocurrency. Since cryptocurrency only exists in digital form, all transactions happen online. In order to send or receive cryptocurrencies, you need to have a digital wallet. These wallets are also encrypted with passwords for increased security.
Can you use cryptocurrency to buy things?
Yes. There are many vendors in the world that accept cryptocurrency as a mode of payment. In fact, there are malls in the world that only accept cryptocurrency as a mode of payment.
What are the problems associated with cryptocurrencies?
The response to cryptocurrency has been controversial largely due to its decentralised nature and anonymity of transactions. If you were to open the public ledger (Blockchain), you would only see numbers everywhere.
There are no names, no addresses and other personal information that are contained in the Blockchain which is essentially a statement of everyone’s accounts revealed publicly.
On one hand, you can argue that this makes it more transparent. But on the other hand, such anonymity makes it a target vehicle for illegal transactions that support criminal activity.
What are the potential benefits of cryptocurrency?
The decentralised nature of cryptocurrency means a lot of benefits for users, some of which includes better security, transparency, zero or lower fees for users.
When paying someone in cryptocurrency, you don’t have to use a third party intermediary that will likely charge fees for their services.
Cryptocurrencies are also recognised on a universal level which means that it is not bound by interest rates, charges or foreign exchange fluctuations which makes it a viable solution for businesses that could save money on international transactions.