How Cryptocurrency Works
Easily put, cryptocurrency is a virtual currency. It is an encrypted decentralized digital currency that is transferred between miners and investors and confirmed in a public ledger through mining for coins like Bitcoins.
Let’s consider the basics, such as public ledgers of cryptocurrency. Being a digital currency there is no actual dollar or coin, but simply record of the coin in the virtual world; a record that is stored in a public ledger. The coin owners are encrypted, and the cryptographic techniques of the system ensure the legitimacy of record keeping. The currency is kept in e-wallets through platforms or on software on the Bitcoin currency owners’ computers.
Cryptocurrency is used by transferring the funds between wallets. For instance, you may have a Bitcoin that is valued at $600 and can exchange the Bitcoin for goods at merchandisers like Dell Computers or transfer the Bitcoin to another e-wallet. When Bitcoins are exchanged, the transaction is recorded in a public ledger. The currency is taken from the e-wallet or wallet, and the wallet uses an encrypted electronic signature that provides mathematical proof that the currency / transaction is the rightful owner of the wallet.
With cryptocurrency, there is no printing of money, nor is the money regulated by the government or insured, so investors and currency owners are a bit vulnerable. Cryptocurrency is mined. For instance, Bitcoin currency must be mined for Bitcoins to be released. There is an actual number of Bitcoins (21 million) that are buried in blocks under difficult mathematical problems that must be solved for Bitcoins to be released. The miner that solves an equation is then awarded a specific number of Bitcoins. When a problem in the block is solved, the block of transactions is added to the ledger for public record. With the transactions, blocks, and blockchain ledger working together there is no way known to add or change a block at will, so the currency cannot be duplicated.
Cryptocurrency like Bitcoin is considered a high-risk investment. However, they are designed with different measures so that the cryptocurrency steadily inflates in value, and works on both large and small scales. For instance, Bitcoin is designed to allow a block to be mined every ten minutes, so approximately 12.5 Bitcoins are released every ten minutes, provided that the mathematical problem is solved. With every 2016 blocks or every two weeks, the algorithm adjusts to get easier or harder, based on how long it took for the 2016 blocks to be mined. With Bitcoins, the equations are said to get harder as fewer Bitcoins are left to mine. As time goes on, the number of coins released per block also become fewer.
With cryptocurrency, a cryptography system is used that controls the creation of the coins, as well to verify transactions. Cryptocurrency is controlled by code, not like currency that is controlled like a centralized government; however, it is not a physical currency like currency controlled by a centralized government, and are typically open source, meaning they are created by developers.
With cryptocurrencies or most of them, a proof of work system is used, since the currency needs to be mined to be released. This assures that there is a record of the mining and transactions. For instance, you solve a mathematical puzzle in a block for Bitcoins to be released, and the proof of work or the solution for the equation and the miner is recorded in a public ledger. However, the Bitcoin currency is not associated with a person’s identity, but a person’s wallet which will have an encrypted address and number as a means of identity, so it is virtually anonymous.
Cryptocurrency is designed to inflate in value. There are a specific number of coins that are generated and hidden in blocks that must be “cracked” for the coins to be released. When all the coins are mined, all the currency is in the hands of consumers and investors.
Cryptocurrency is unfamiliar to many people; and, many were introduced to cryptocurrency with the excitement of Bitcoin. Bitcoin is the world’s first cryptocurrency of its kind and one that has skyrocketed in value within a matter of years. Cryptocurrency like Bitcoin is considered a high-risk investment, but one that has the interest of even the general consumer. It is predicted that the last Bitcoins will be mined in 2040, which leaves plenty of time for the currency to continue to inflate in value.
As to what will happen when all the Bitcoins are mined; there are many guesses.