Today, virtual currency, digital currency or cryptocurrency is a global phenomenon, as you would like to call it, and at least the general term has reached every ear. But on what principle does virtual currency work and how can you benefit from it? The answers to these questions are unknown to most of us.
What is cryptocurrency and how did it appear?
In fact, digital currency has emerged as collateral for another invention. Satoshi Nakamoto, the inventor of Bitcoin, the most popular cryptocurrency to date, never intended to invent a currency. In 2008 he announced that he had developed a “P2P electronic cash system”.
There have been many attempts to create currency or digital currency over the years, but they have failed. Satoshi’s most important invention came up with a way to develop a decentralized digital currency system.
How are Cryptocurrencies Created and How to Verify Transactions?
Let’s look at the mechanisms that manage cryptocurrency databases. Virtual currencies like Bitcoin are limited to a network of entities (blockchain technology). Each entity has a full history of all transactions and a record of each account’s balance.
The transaction is a file that says “Anne pays Jeanne X Bitcoin” and is signed with Anne’s private key. This is a basic example of encryption based on public keys. Once signed, the transaction is stored on the network and transmitted from one entity to all other entities on the network. This is a P2P technology. This architecture is called blockchain.
Blockchain-The Technology Behind Digital Currencies
When a cryptocurrency transaction occurs, it is almost immediately public and known to the entire network. However, the transaction will be confirmed after a while. Confirmation is a fundamental concept in the world of virtual currency and is very important. Unless the transaction is confirmed, it is pending and may be false. Once confirmed, it can no longer be manipulated, can no longer be cancelled, and is a transaction history, i.e. part of the blockchain.
Mining Cryptocurrencies-What Does Miners Do?
In principle, anyone can mine virtual currency. Since decentralized networks do not have a central authority to delegate these tasks, cryptocurrencies need some kind of mechanism to prevent abuse. If a network entity can spawn thousands of other entities and broadcast bogus transactions, the system crashes immediately. As a result, it has been established that miners must have powerful computers to do this. They need to find a hash (a result of the cryptographic function) that associates the new block with the old one. This is called proof of work.
The hash generation algorithm can be considered a kind of cryptographic puzzle that miners have to solve. Once a solution is found, miners can create blocks and add them to the blockchain. As a reward, miners will receive a certain number of bitcoins. This is the only way to effectively generate Bitcoin.
So, virtual currency, cryptocurrency, or digital currency actually refers to a line of code that is created by cryptographic methods and is based on a decentralized system. It is exchanged, purchased, sold, and traded through an electronic wallet.
Cryptographic technology is used to regulate the amount of digital currency generated and the transfer of funds over a period of time. So, because the name of the cryptocurrency is based on the process of obtaining a general consensus through cryptography. It is designed with a mathematical algorithm, so it provides a high level of security.