Cryptocurrency: What is it and how does it work?

There have been various attempts to create digital money but none of them stuck until 2009.

The first digital currency, bitcoin, wasn’t created on purpose. Satoshi Nakamoto (the unknown inventor of bitcoin) set out to create a peer-to-peer electronic cash system with no central entity - now known as blockchain technology. This industry disrupting technology opened the door for cryptocurrency and ultimately bitcoin to be created.

Cryptocurrency
When you really look at it, cryptocurrency is just entries in a database that no one can change without satisfying certain conditions - just like the money in your bank account.

All cryptocurrencies have a limited supply and must be ‘mined’. Mining is essentially verifying transactions and adding them to the blockchain. Users must compile recent transactions into blocks and try to solve complex puzzles. The first user to solve the puzzle gets to place the next block on the blockchain and can claim the reward.

This digital cash uses cryptography - the processes of protecting information by converting it into an unreadable format, called cipher text. Cryptography is also used to protect emails, credit card information and corporate data.

Fun fact: Cryptography was created during the Second World War as a way to secure communications. Now, with the help of mathematical theory and computer science, we can use cryptography to secure communications, information and money online.

How Does It Work?

Imagine this: Our currency is large, smooth rocks. Everyone keeps their rocks in a public place so everyone else knew exactly who owned what. When you wanted to make a purchase, you would alert everyone that you were transferring your rock to someone else (verifying the transaction) and you would no longer own that rock.

Anyone who wanted to make a new rock (mining) would help to confirm transactions, and would need to take the time to dig up the rock and smooth out all of the edges. The time spent digging up and smoothing out the rock would make it valuable and worth something to others who use rocks as currency. There are only a limited amount of rocks that can be dug up.

This infographic further explains how cryptocurrencies use blockchain technology to facilitate transactions.

Source: Rublix.io

Different Types
There are well over 1, 000 different types of cryptocurrencies out there but we are going to go over some of the most well known ones.

Bitcoin - Bitcoin is the original cryptocurrency, and the most well known around the world. Using blockchain, bitcoin allows us to make peer-to-peer transactions using digital currency. The transactions are pseudo-anonymous and are verified by the decentralized network itself.

Ethereum - Ethereum is different from most cryptocurrencies in that it uses blockchain technology to enable developers to create and deploy decentralized applications. On this blockchain, miners work to earn ether - a crypto token that fuels the network, much like our Rublix token, which rewards our users for providing high quality trade analysis.

Litecoin - Litecoin was one of the early alternatives to Bitcoin. It was launched in 2011 because mining bitcoins was becoming a challenge due to expensive hardware, and the amount of people who were able to participate was shrinking. Litecoin uses an algorithm that allows anyone with a regular computer to participate in mining.

Ripple - Ripple is the name for the currency as well as the open payment network that the currency is traded on. The network has been designed to facilitate the transfer of any type of currency, including Bitcoin, USD, EUR, and other units of values like frequent flier miles and commodities.