An Absolute Beginners Guide to Cryptocurrency
So you’re at a dinner party and the topic of conversation turns to cryptocurrency. Words like blockchain, wallets, mining, and distributed ledger are thrown around and you have absolutely no idea what they’re talking about and absolutely nothing to contribute to the conversation.
Cryptocurrencies are most likely not going to fade into obscurity anytime soon, so you might as well educate yourself on what they are and become a part of the conversation.
What are Cryptocurrencies?
Cryptocurrency is digital cash which allows for seamless and fast transactions between parties. You have complete control over your payments and are able to spend and earn with ease. Due to the fact that you have complete control over your cryptocurrency, you don’t have to rely on a central authority – such as a bank – to validate transactions, as all necessary validation is done by the cryptocurrency network.
Cryptocurrency is stored in digital wallets used to manage payments and each wallet is protected by a private key – an extremely complex password – which only the wallet owner is privy to.
What is Blockchain?
A block is a complex mathematical problem based on cryptographic technology – known as “hash” – which computers aim to solve, and the block is only complete once the mathematical problem is solved. When a new block is added, data is taken from the previous block, creating a chain – hence the name. Cryptocurrencies rely on blockchains in order to operate and much like the stocks, the value of the different cryptocurrencies fluctuates allowing for Bitcoin betting!
Blockchain technology is incredibly secure because if any information inside the block – such as transactional data – is changed, the block becomes invalid or broken and the only way to fix it is to replace the data with the original, correct data. As such, blockchain is used to store an indisputable transaction ledger for the currency.
How Does Cryptocurrency Mining Work?
People known as ‘miners’ use incredibly powerful computers to solve these mathematical problems by bundling together transactions and are given payment for their work in cryptocoins and/or transaction fees. An important part of the miners work is to validate a transaction, done by ensuring that the party attempting to send cryptocoins has enough to send – accomplished by examining the existing blockchain to determine the wallet’s balance.
Every transaction made by every wallet is viewable to all, which has raised privacy concerns as anyone can track your spending, but there are existing technologies put in place to provide complete anonymity while still maintaining the veracity of the blockchain.
What is a Distributed Ledger?
Once a miner successfully solves a new block, it is announced to the network for acceptance by other miners. Other miners then verify the transactions – a security measure put in place to ensure that a rogue miner doesn’t attempt to enable invalid transactions – and add new blocks to the latest blockchain. Older transactions are validated by the adding of new blocks to the chain and the more blocks the chain has, the more it is trusted. This process is known as a distributed ledger as a network verifies the transaction ledger. Unlike the central ledgers held by banks, the distributed ledger cannot be counterfeited or hacked as this would invalidate a block, breaking the chain.