Here’s How does Cryptocurrency Work and What is the Use of Cryptocurrency?
Here’s How does Cryptocurrency Work and What is the Use of Cryptocurrency?
A cryptocurrency is a virtual or digital currency that can be used to purchase goods and services; Which means no physical coin or bill is used and all transactions happen online. To ensure that online transactions are completely secure, it used an online ledger with strong cryptography. Here, we have covered all the details related to cryptocurrency such as types, how it works, uses, how to buy and store it.
What is cryptocurrency?
It is a purely virtual line of currency that runs on the system of cryptography. It acts as a decentralized medium of exchange where cryptography is used to verify and facilitate every transaction. Cryptography also outlines the creation of units of various cryptocurrencies.
This mode of exchange primarily runs on blockchain technology – which gives cryptocurrencies a decentralized status. It is a shared public ledger that contains all transactions that have ever taken place within a network. Therefore, everyone on the network can see every transaction that takes place as well as the balances of others.
Blockchain technology addresses one of the primary concerns with digital payment platforms, namely, double spending while ensuring that there is no monopoly of authority. This is because, in blockchain technology, the parties to the transaction themselves verify and facilitate each such activity.
How did the idea of crypto currency come about?
The concept of digital currency gained a lot of traction in the tech boom of the 90s. Many organizations and programmers have ventured to create a parallel line of currency that is beyond the reach of any central authority. However, ironically, the companies that tried to create this digital currency assumed the right to verify and facilitate transactions on their own.
It not only defeated the purpose but also set up the enterprise. In addition, the digital currencies of the time were rife with fraud and other financial challenges. For a long time since then, this idea of a digital currency was considered a lost cause. This idea proved to be wrong when Satoshi Nakamoto – a programmer or a group of programmers – introduced and explained bitcoin, the first cryptocurrency, in 2009.
How does cryptocurrency work?
According to Satoshi Nakamoto, the founding father of bitcoin, it is a peer-to-peer electronic cash system. In this, it is similar to peer-to-peer file transactions, where there is no involvement of any central authority or regulator.
Ergo, cryptocurrencies are simply transactions or entries in a shared ledger that can be exchanged only if certain prerequisites are met. Typically, in blockchain technology such as the bitcoin network, there are parties involved in each transaction – the sender and receiver – wallet addresses or public keys and the volume of such transactions.
The feature of the safety net in such networks to avoid fraud is that the sender is required to confirm the transaction with his or her private key. After confirmation, the transaction is reflected in the shared ledger or database.
However, only miners are authorized to confirm transactions within the cryptocurrency network. They need to solve a cryptographic puzzle to confirm a specific transaction. In exchange for their service, they receive a transaction fee and a reward in that particular type of cryptocurrency.
Once miners confirm a transaction, they spread it across the network, and each node in it automatically updates its ledger accordingly. Furthermore, once a miner confirms a particular transaction, it becomes irreversible and non-convertible.
However, mining has a significant catch. The point is that as a particular type of cryptocurrency gains popularity and more and more miners join the bandwagon, miners’ fees and reward per transaction decrease. For example, initially, miners could get 50 bitcoins (BTC) as a reward for mining; However, due to the recent halving in May 2020, the reward for miners has come down to 6.25 BTC.
What is the use of cryptocurrency?
It is surprising whether the popularity that the cryptocurrency has gained over the years is hollow. However, even though it is still nowhere close to replacing institutional cash, cryptocurrencies, especially bitcoin, have gained wide acceptance around the world.
As Payment Method
Initially, bitcoin had little value as a method of payment for merchants. However, over time, many merchants across the world such as restaurants, flights, jewelers and apps have started accepting it as a viable payment medium.
One of the most notable acceptors of cryptocurrency as a viable medium of payment is Apple Inc. It allows 10 types of cryptocurrencies to transact in the App Store.
However, India as an economy is yet to explore cryptocurrencies widely as a viable payment mode. Nevertheless, due to large companies such as Apple and Facebook, it is expected that the cryptocurrency will get traction in India.
Investment Cryptocurrencies, especially bitcoin, are one of the most attractive investment options currently out there. Its price appreciation is highly dynamic and can prove to be an excellent opportunity for capital expansion.
However, individuals should also pay attention to the volatility of this investment avenue. Bitcoin, the most popular cryptocurrency with the largest market share, has experienced some of the most uncertain price changes as an asset. For example, in December 2017, the value of bitcoin fell from $19000 per BTC to $7000 per BTC.
Since cryptocurrency is not rooted in any physical change but a change in popularity and craze, such price fluctuations are natural.
Top 10 cryptocurrencies currently trading in the market.
What are the Different Types of Cryptocurrencies?
When it comes to variants of cryptocurrencies, most are forks of bitcoin, while others are created from scratch. However, currently only 3 broad types of cryptocurrencies exist. These are –
Bitcoin It is the first cryptocurrency ever introduced and is considered “digital gold”. It currently holds a market capitalization of $172.76 billion, which is the largest of any other type of cryptocurrency. A unit of bitcoin can be broken down into satoshis, which are equivalent in relation to the rupee and money.
Furthermore, the bitcoin network is so designed that it can only hold 21 million units of bitcoin in circulation at any one time. This limited availability is a primary factor that drives its market value. Currently, the market supply of bitcoin is 18.39 million.
Altcoins This category mainly includes forks and alternative versions of bitcoin, thus, the name. However, some altcoins differ sharply from bitcoin and use different algorithms. For example, Ethereum, which is an altcoin, is not a currency, but a platform where entities can build their apps based on the blockchain.
Currently, there are over a thousand altcoins. Some notable altcoins are Ethereum, Factom, Litecoin, NEO, etc.
Token These are products of altcoins such as Ethereum and NEO. These cryptocurrencies do not have a separate blockchain but instead run on decentralized apps created through such altcoins. However, the token has little value compared to the other two types mentioned above, as it can only be used to purchase items from such decentralized apps or dApps.
How to invest in cryptocurrency?
Compared to other variants of the cryptocurrency, units of bitcoin can be purchased more easily due to the large number of options. Individuals can choose to purchase it from cryptocurrency exchanges using gift cards through investment trusts.
How to store cryptocurrency?
Entities can hold units of cryptocurrency in wallets – offline and online. Each such wallet has a public key, i.e. the wallet address, and a private key (used to sign payments). In any case, it is not actually the units of the cryptocurrency but the private key.
Nevertheless, institutions can choose from a wide range of crypto wallets, each catering to a different purpose. Online wallets largely serve the purpose of regular transactions. Apple, as well as JPMorgan Chase, Visa and Facebook, have introduced online crypto-wallets. In contrast, offline or cold wallets are stored in an individual’s hard drive and serve the purpose of protecting the cryptocurrency.
Cryptocurrency – Frequently Asked Questions
Question. What is Blockchain Technology?
Answer. The term “blockchain technology” refers to a transparent, trustworthy, publicly accessible ledger that allows the secure transfer of ownership of units of value using public key encryption and proof of work methods. The first successful implementation of blockchain technology was the bitcoin network.
Question. What is the transaction fee of bitcoin?
Answer. All bitcoin transactions must be linked to the blockchain, which is the official public ledger of all bitcoin transactions. Once added it will be considered successfully completed or valid.
Question. What is the working process of cryptocurrency?
Answer. Cryptocurrencies use decentralized technology to secure payments and deposit money through a bank without having to obtain users’ names.
Question. Is cryptocurrency safe to invest?
Answer. Cryptocurrencies are generally volatile in nature and cryptocurrency investments can be risky at times. However, all types of investments carry some degree of risk. But risk aversion should always be well researched, especially when it is your hard earned money that you are looking to invest.