What Is Cryptocurrency And How It Works?

Cryptocurrency is a digital asset. It was originally designed to be an unmanaged payment system using thousands of nodes (computers) to execute transactions without human intervention.

The database that is used is called Block Chain and it is designed not to be edited. Meaning you can keep adding to the database but can never edit the data that was previously saved.

Cryptographic Hash is a function to encrypt a value to get an encrypted equivalent value.

The first record will be given an initial hash value then each record is hashed, this hash value will be used to connect the new record to the last record.

Any changes from the value will also change the hash value. These changes will also lose the chain connection making the other records invalid.

In order for anyone to change any existing value, 51% of the nodes must be changed so no one person or company should control more than 50% of the nodes.

How Does Crypto Work?

There are different functions of crypto today but before you learn all the other functions or projects behind crypto let's discuss the first function of Bitcoin which is the original cryptocurrency.

Bitcoin is a ledger system designed to be run independently by thousands of computer nodes using blockchain technology and a proof of work process to validate the transaction.

When you send money to another person, it first checks how much money you have then if you have more funds than what is being sent, it continues the process.

Next, the transaction is then hashed looping for 1 to whatever count until the first 4 characters of the hash value starting with "0000" or 4 zeros.

The number its loops to get the first hash value that has 4 zeros is called the nonce.

The process of looping until you get the correct nonce is call Proof of Work.

Whoever produces this value and submits it to the node will be rewarded a certain amount of that coin.

This process is called crypto mining where people are paid when their computer was the first one to submit the correct hash value to the network.

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You can view this image to see how it works.

On the first box, the Block number is 1 because it's the first record.

The Data box will contain the transaction that is being submitted to the network.

Prev is the record it is going to connect to. Since the first box is the first one the previous hash is "000000000...".

The program will loop from 1 to 11316 until the results have 4 zeroes on the hashed result.

This hashed result will now be the Data ID of this record.

On the second box, the Block number is 2 because it's the second record.

The Data box will contain the transaction that is being submitted to the network.

Prev is the record of the previous hash that was submitted to the network.

The program will again loop from 1 to 35230 until the results have 4 zeroes on the hashed result.

This hashed result will now be the Data ID of this record.

This is a very simple illustration of how cryptocurrency works and how blockchain records are related to each other.

Who invented cryptocurrency?

Though most of the running parts of cryptocurrency were already in existence since the late 80s, the person that is known to implement the first cryptocurrency was Satoshi Nakamoto.

Nobody really knows who Satoshi Nakamoto is. Is he an alias or a real person?

Many have different theories on who Satoshi Nakamoto is and what companies is he the CEO of.

But no one really has real proof of this nor what happened to him after Bitcoin was implemented.

What is the first cryptocurrency?

Bitcoin is the first know and implemented cryptocurrency. There are a lot of personalities that have helped build Bitcoin but it was led by Satoshi Nakamoto.

There are 21 million Bitcoins in circulation and this number will never go up. 

This is the advantage of cryptocurrency, unlike in the real world where governments keep printing money making the value depreciate.

Bitcoin appreciates in value as there because there will be no more Bitcoins to be added into circulation.

As many people get interested in Bitcoin the price will keep going up. 
 

What is the purpose of cryptocurrency?

The main reason why cryptocurrency was implemented it to avoid centralized control of any person or organization such as a company or government.

It runs on a decentralized platform so it cannot be controlled, edited, or even shut down.

Of course, anything can be shut down but the difficulty that would take to shut it down now is very high.

The nodes are distributed in different countries where no 1 government controls. 

Many miners are making so much money with their running network of nodes.

Should there be a law that would order them to stop operations, who would give them the money that they are currently generating should they stop?

This is all done so people can have a payment system that is unmanned that runs 24/7 365 days a year with no one controlling the processes.

If you really think about it, this is so awesome.

How do you store cryptocurrencies?

There are what are called crypto wallets where you can store your cryptocurrencies.

There are a lot of different wallets but let's classify these wallets as online wallets or cold storage wallets.

Online wallets are wallets you can install on your computers or cell phones. Mostly they are connected to the internet and for this reason, it is hackable. You need to be aware of securities to avoid being hacked.

Cold storage wallets are wallets you can transfer your cryptocurrencies and then keep this wallet on your safe without any internet connection.

Pros and Cons of Cryptocurrency

Pros

Crypto appreciates in value because of scarcity

Ease of transfer of funds

No restrictions

Transactions are done anonymously

No geographical restrictions

Cons

Wallets can be hacked

It could fluctuate in value a lot going up and going down

It had a reputation for being used in illegal activities

Conclusion:

Cryptocurrency is the way of the future and we can embrace it now or later.

No matter if we like or believe in crypto, it's here to stay.

Though there are some technicals involved in cryptocurrency most people will not have to deal with it.

All you need to know is how to use it just like regular money.

Now you know how crypto works, you can now take advantage of this wonderful technology of our time.