Cryptocurrency is a digital cash or internet money that is making its way up in the world of finance at a rapid pace. In 2008 “Bitcoin” emerged as the first cryptocurrency. Satoshi Nakamoto, the unknown inventor of Bitcoin, invented cryptocurrency as the side product of his development of “A Peer-to-Peer Electronic Cash System.” The most important feature of Satoshi’s invention is that it is a “Decentralized Digital System” Decentralized means that cryptocurrency network isn’t controlled by one central authority like central government or central bank. A network of users control and verify transactions instead of a central authority.
The peer to peer system allows one person to pay directly to other person for goods services. However, once money is exchanged the transaction is recorded publicly onto a ledger known as a “Block Chain.” But how does this all work on a large scale of businesses?
Let’s have a talk about all about the ambiguities regarding cryptocurrency and see how does it work? What is Block Chain?Who are Miners? And what is the future of Cryptocurrency?
How miners create coins and confirm transactions
Let‘s dig deep into the mechanism ruling the databases of cryptocurrencies. A cryptocurrency like Bitcoin consists of a network of peers. A complete history of transactions is recorded and every peer has a complete data of transaction history and thus of the balance of every account.
A transaction is like a file that is signed by the paying person by his private key. It‘s basic public key cryptography, nothing special at all. After signed, a transaction is broadcasted in the network, sent from one peer to every other peer. This is basic p2p-technology. Nothing special at all, again.
The transaction is known almost immediately by the whole network. But only after a specific amount of time when it gets confirmed that is a quite critical concept in cryptocurrencies.
As long as a transaction is unconfirmed, it is pending and can be forged. When a transaction is confirmed, it is set in inevitable. It is no longer forgeable, it can‘t be reversedand becomes the part of an immutable record of historical transactions: of the so-called blockchain.
But who confirm the transactions?
Only miners can confirm transactions. This is their job in a cryptocurrency-network and they get rewarded with a token of the cryptocurrency. They take transactions, stamp them as legit and spread them in the network. After a transaction is confirmed by a miner, every node has to add it to its database. It has become part of the blockchain. Anyone who is the part of the network will have access to this record.
Primarily anyone can become a minor as this system is not decentralized to a specific authority or government. There is a mechanism to prevent one ruling party from abusing it. To avoid that Satoshi set the rule that miners need to invest some work of their computers to qualify for this task. In fact, they have to find a hash – a product of a cryptographic function – that connects the new block with its predecessor. This is called the Proof-of-Work. In Bitcoin, it is based on the SHA 256 Hash algorithm.
This it can be the basis of a cryptologic puzzle the miners compete to solve. After miners get successful in finding the solution they can build a block and add it to the blockchain. He can then add coinbase transaction that gives him a specific number of Bitcoins. This is the only way to create valid Bitcoins.
Bitcoins can only be created if miners solve a cryptographic puzzle. As the computer power increases the difficulty of this puzzle also increases and there is only a specific amount of cryptocurrency token that can be created in a specific given time.
Transactional Advantages of Cryptocurrency:
Neither transactions nor accounts are connected to real world identities. You receive Bitcoins on so-called addresses, which are randomly seeming chains of around 30 characters. While it is usually possible to analyze the transaction flow, it is not necessarily possible to connect the real world identity of users with those addresses. After confirmation, nobody can reverse a transaction. And nobody means nobody. Not you, not your bank, not your miner, not even Satoshi himself can reverse it. If you send money, you send it. Period. No one can help you, if you sent your funds to a scammer or if a hacker stole them from your computer. There is no safety net.
Transactions are circulated within seconds in the network and are confirmed in a couple of minutes. They are completely indifferent of your physical location since they are globally and digitally conducted. It doesn‘t matter if I send Bitcoin to my neighbour or to someone on the other side of the world.
The funds of cryptocurrency are locked in a public key cryptography system. Only the owner of the private key can send cryptocurrency. Strong cryptography and the magic of big numbers makes it impossible to break this scheme. Some even say a Bitcoin address is more secure than Fort Knox.
You don’t need anyone’s permission to start using cryptocurrency. It‘s just a software that everybody can download for free. After installation, you can receive and send Bitcoins or any other cryptocurrency. No one can prevent you. There is no gatekeeper or restrictions.
Alternative Coins
"Altcoin" is a combination of two words: "alt" and "coin"; alt is short for alternative and coin signifies currency. Thus together they imply a category of cryptocurrency that is alternative to the digital currency Bitcoin.
The basic frame work of many Alt-Coins is based on the one provided by Bitcoin. Hence they most of Alt-Coins are peer-to-peer, involve a mining process and offer efficient and cheap ways to carry out transactions on the web. But even with many overlapping features, Alt-Coins vary widely from each other.
There are some alternatives of Bitcoin that can someday rival the Bitcoin in market of digital currencies. In fact the competition is getting tight these days with the rising market cap like Ethereum, Ripple, NEM, Litecoin etc.
Future of Cryptocurrency
The revolution is already happening. The world of finance is greatly influenced by fast and wildly emerging cryptocurrency market. The old days are gone when there were old money making businessmen keep on making money while kicking new investors out of market. The competition is on the basis of talent and tactics. In few years to come it is believed that cryptocurrency might even take over the business transactions because of its two main properties. First it is peer to peer transaction without involving any third party and paying twice. Second its blockchain transaction technology. Blockchain technology provides the largest benefit with trustless auditing, single source of truth, smart contracts, and color coins.
Cryptocurrency opens up a whole new platform for innovations. It is changing finance in the same way as web change journalism. When everyone has access to global market, great ideas flourish.