What is Crypto? It is a form of electronic cash that does not rely on central banks or other trusted third parties to validate transactions or produce new currency units.
I believe that there are so many misconceptions as to what cryptocurrency is. The reason being is that it is still rather new and still developing into maturity. The aim of this article is to explain cryptocurrency in simple and concise words. Hopefully by the end, you should have gained more clarity on the concept and purpose of Cryptocurrency.
What this article will cover
The easiest way to describe what cryptocurrency is is to imagine it as any regular currency. Except it is digital. Essentially, it is a digital currency. ‘Crypto’ refers to cryptography which is a technique used within cryptocurrencies.
Cryptocurrencies utilise Blockchain Technology. The Blockchain records important information and every single transaction which is verified and secured by computers or nodes using cryptography.
Cryptocurrencies are much more advanced and convenient when compared with regular currencies. The reason being is that it does not require a middleman to verify transactions as required by central banks and institutions etc. Moreover, transactions are more efficient this way and require less duration of transactions to process.
Cryptography enables transactions to be confirmed on a publicly distributed ledger on the Blockchain network. This allows direct peer-to-peer payments.
Bitcoin is the birth to all cryptocurrencies. Bitcoin was first launched onto the Blockchain in 2009, by an anonymous developer that went by the name of Satoshi Nakamoto. His agenda was to improvise a way that would allow for users to send and receive transactions within seconds. Till today, the identity of Satoshi Nakamoto is still unknown.
To successfully use cryptocurrency as a form of payment. One must acquire a digital wallet. Wallets are used to transact to peers etc. Each wallet contains a public key and a private key. The public key serves the purpose of an address. This address is used to receive cryptocurrencies. The private key can be imagined as the equivalent of a digital signature.
The majority of cryptocurrencies operate on blockchain. The blockchain is a large pool computer network that operates across the globe. In order for transactions to be validated and secured onto the blockchain. Miners are required to invest computational power and time to find solutions to solve complex mathematical problems. Once the miner has successfully solved the piece to the puzzle they are rewarded financially.
The decentralised and public nature of distributed ledger technology, as well as the encryption process that each transaction goes through, make the blockchain technology that supports cryptocurrencies inherently secure.
One of the risks to consider is that no one can help you if you forget or lose the private keys that enable you access to your crypto. Using a respected exchange is a more forgiving alternative – it demands confidence, but you aren’t at risk of losing your confidential information.
The security of public-key cryptography has yet to be cracked. You’re probably more likely to have any of your other internet accounts hacked than to have your assets taken if you use adequate security procedures. Being aware of, keeping your private keys offline at all times, and backing them up in a secure location are all good practises.
Cryptocurrencies aim to overcome the problem of absolute power by sharing it across a large number of people, or, better yet, among all network participants. That is, after all, the core concept underpinning blockchain technology.
The majority of cryptocurrencies have a finite number of coins available. When all of those currencies are in circulation, there is no straightforward method for a central authority or the firm behind the blockchain to simply generate more coins or increase the supply.
When you use traditional cash, you’re essentially handing over total authority to central banks and the government. If you trust your government, that’s fantastic, but keep in mind that your government can freeze your bank account and prevent you from accessing your funds at any time. With Cryptocurrencies you essentially act as your own bank.
When you use traditional money, an intermediary, such as your bank or a digital payment service, gets a cut every time you make a transfer. All network participants on the blockchain are that middleman with cryptocurrencies; their compensation is formulated differently from that of fiat money middlemen, and so is small in contrast.
Check out our article on “What is Blockchain”. The article goes into more depth about cryptography and how blockchain functions. By understanding more about Blockchain you will also gain more understanding on Cryptocurrencies.