A cryptocurrency is a form of digital money that is based on blockchain technology. There are thousands of cryptocurrencies in circulation today. The most popular ones, such as Bitcoin and Ethereum, are among the older digital currencies.
In some cases, one can use cryptocurrency instead of money to purchase products and services. The value of each cryptocurrency changes based on the crypto market. But most prefer to treat cryptocurrencies as assets, investing in them like they would in company stocks.
If you are looking into getting cryptocurrency or investing in it, it would be best to research and understand how their value has fluctuated and understand the associated risks. That said, cryptocurrency is an exciting and unique form of asset that holds promising growth potential.
Unlike physical money, such as the U.S. dollar or pound sterling, cryptocurrency is decentralized, digital, and encrypted. This means a central authority does not manage or control it, allowing its value to change based on the cryptocurrency market and the demand and supply relationship. The responsibility of overseeing cryptocurrency lies on users through the online world.
Bitcoin, the first-ever cryptocurrency, was officially released on Jan. 3, 2009. This was the year after it creator, Satoshi Nakamoto, outlined the principle in his paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System." Bitcoin was meant to be a form of electronic payment that was founded on proof instead of trust. The proof that the cryptocurrency relied on was a technology known as the blockchain.
A blockchain is used to verify and record transactions that use cryptocurrency. This program is a digital ledger for currency transfers. The technology works similar to a chequebook but is instead distributed to computers worldwide. "Blocks" are used to record transactions linked together on a "chain" with older blocks.
Every user has a copy of the blockchain, making it unified and reliable. Each new transaction is recorded on the system and updates every user's copy simultaneously. Thus, the program allows all users to have accurate and identical records. In addition, the technology uses either "proof of work" or "proof of stake" to check the validity of transactions to prevent fraudulent exchanges.
Cryptocurrency transfers or exchanges need to be validated or verified before they can be added to the blockchain. There are two main ways that this is done: proof of work and proof of stake. Each technique rewards verifiers with additional cryptocurrency. But how do these two differ?
This technique verifies crypto transactions on a blockchain by having computers race against one another to solve a mathematical problem created by an algorithm. Each computer system that participates in the race is often called a "miner" and is given a small amount of crypto if it is the first to solve the mathematical problem.
The process of cryptocurrency mining requires a large amount of power and electricity. Therefore, computers that are trying to become the first to solve blockchain puzzles are a significant investment. As a result, miners risk losing money even if they are rewarded for their work with cryptocurrency when power and electricity costs outweigh the value of the currency mined.
Proof of stake reduces the power needed to validate or verify cryptocurrency transactions. Using this technique, a person can have the authority to verify a limited number of exchanges based on the amount of cryptocurrency they are willing to "stake."
This process stores the currency in a communal safe in exchange for becoming a validator, similar to how bank collateral works. Additionally, if a person is chosen to be a part of the process, their chances of being selected increase with the amount of crypto they stake. Finally, proof of stake prevents fraud by punishing chosen validators a portion of the cryptocurrency they staked if they verified invalid transactions.
The two validation techniques mentioned above rely on mechanisms known as consensus to verify transactions for the blockchain. The process means that while an individual user verifies a cryptocurrency transaction, most users in the blockchain must check and validate each exchange for it to be considered valid. This level of security makes it challenging for hackers and frauds to fake a crypto transaction because they would need to make more than half of the blockchain ledgers match their fraudulent exchange.
When you want to use your crypto to purchase products or services from financial institutions, people, or retailers that accept cryptocurrencies, you'd need to use a crypto wallet, such as Avarta. Wallets allow users to interact with the blockchain to send and receive crypto assets through the internet securely.
If a user wants to transfer cryptocurrency to another party, they can scan the recipient's QR code or manually input their wallet address. Crypto exchanges are not instantaneous and require proof of work or proof stake to be finalized. This requires some times, but the duration between the transaction and finalization contributes to how transactions added to the blockchain become secure.