There is a huge amount of buzz is going nowadays on cryptocurrency. As, digital currencies, bitcoins, virtual currencies have been immensely popular terms on the internet. This is a guide for dummies or newbies, who are interested and want to know about cryptocurrencies, bitcoins etc. Here we will discuss the foundation of cryptocurrencies, benefits of using them over traditional financial bankings or institutions.
Cryptocurrency is the digital currency used as the medium of exchange and uses cryptographic techniques like encryption to secure the transactions and to control the generation of more units of coins or currency. Cryptocurrencies are decentralized means they are not controlled by government or any centralized financial institution, as compared to physical currencies (or physical piece of papers) like dollars and pounds which are issued and controlled by the governments.
First ever cryptocurrency introduced was Bitcoin, which was invented by Satoshi Nakamoto (an individual person or group). Bitcoin is developed and controlled by the underlying technology called Blockchain. Blockchain consists of a chain of blocks, and each block (also called record or entry) contains sensitive data, hash value, and the hash value of the previous block, which makes the chain of blocks, called blockchain.
The hash value is generated as unique identifier of a particular record or block, used to identify the block and content of that block in blockchain. The hash value is the complex strings of characters generated for each new block by applying encrypted techniques.
HOW CRYPTOCURRENCIES ARE GENERATED
One coin or currency is created in the process of mining which ensures that every created coin is unique. Mining is the Peer-To-Peer Network in which peers (also called nodes or miners) are the thousands of individuals who own powerful computer machines which solve the complex math and cryptographic problems. They compete against each other in trying to solve the next block, means discovering a correct hash value which will connect the new block to the previous one in the blockchain. Miners are awarded with the coins, for their effort of maintaining and controlling the ledger (or blockchain).
Peer-to-peer network also solves the problem of double-spend. Double-spend is one of the fraudulent technique in which one person sends one coin to two or more people. In blockchain, once an entry or block is added to the chain, it cannot be altered or changed, because all miners have one separate copy of the ledger
BENEFITS OF USING CRYPTOCURRENCY
- Cryptocurrencies provide benefits of quick transactions between two parties and take very low processing fees, which allow users to avoid expensive fees which traditional financial entities like banks charge on each transaction.
- Using cryptocurrencies like bitcoins, we can perform one-to-one transactions without third-party interferences, as compared to traditional banking systems which takes several days or months to perform one country-to-country transaction and goes through several third-party checking systems, but cryptocurrencies take minutes to perform country-to-country or long distance transactions directly between two parties
- Cryptocurrencies provide security in several ways like they use the combination of private and public keys: the private key is used to access our own coin and the public key is shared by others so that they can transfer coins in our account. Without knowing both keys, no one can access our coins.
- Most cryptocurrencies are built on the architecture of blockchain which contains structure in which one block is containing the hash value of the previous block, making the chain of blocks, so if any hacker try to change any single transaction, he will have to change all following transactions to take control of the blockchain or alter any transaction because changing one transaction causes the change in its hash value so if one transaction becomes invalid all subsequent transactions become invalid, so it is very difficult to tamper or change one transaction in blockchain, and once any new block or record is added in the blockchain, it cannot be changed
- When using traditional banking credit or debit cards, we used to give credit cards to merchants or any other entity, we are actually giving some of our personal information, but in cryptocurrency our identity remains hidden to any bank or government because transaction is done between two parties and no any person can steal our information, hence there is no fear of identity theft in cryptocurrencies
- Cryptocurrencies provide easy access as compared to traditional financial banking systems where we require the account and any withdrawal software to see our information, but in cryptocurrencies, we only require the internet connection to see information for bitcoins or any other digital currency
- Cryptocurrencies introduced the concept of digital wallet, as in traditional banking systems we used to have an account number associated with any bank which we use to send and receive money, but in cryptocurrency, we use digital wallet in which we store our private key which shows our ownership of wallet and public key which we share with others to send us money (same as account number in traditional banking). So we use our wallet to send and receive money and we keep our wallet to ourselves, thus we require no third-party and we are on our own to use our wallet whenever we require or wish. Most digital currencies like bitcoins have a digital wallet
EXAMPLES OF CRYPTOCURRENCIES
Ever since the bitcoin is introduced in back 2009, a vast number of people or organizations got their interest in the cryptocurrency, and they started creating their own digital currency. Since then, over a 1500 or more digital currencies have been created. Bitcoin has been the inspiration for the invention of later cryptocurrencies which are called “altcoins” collectively. Most popular cryptocurrencies are Bitcoin, Ripple, Ethereum, Litecoin, Maker, Bitcoin Cash, Zcash, Dash, DigixDAO and Monero.