Cryptocurrencies: Changing the way money and assets are transferred
Since Bitcoin’s official release in January 2009, cryptocoins have transformed the financial industry. Many have heard about popular cryptocurrencies such as Ethereum or Bitcoin or Ripple or maybe even heard about ICOs, but few know how they work, where they come from or what is needed to get started in the crypto space. So this is your guide to understanding cryptocurrencies and how they are reinventing the financial landscape of tomorrow.
What are cryptocurrencies?
Today, everything is going digital; however, minveney and cash, for the most part, have been left behind. Even when using online transfers or credit cards, you still expect your physical money to exist somewhere — whether it is in a wallet or a bank. However, cryptocoins are changing these outdated notions of physical cash or third parties and storing the digitized format of your funds on a digital database known as a blockchain — the technology that was introduced by Bitcoin.
Put simply, a cryptocurrency lets its users transfer funds almost instantly. A digital currency does not rely on a third party, and that successfully lowers the transaction fees. However, over many years, cryptocurrencies like Litecoin, DASH, TenX, Binance, VeChain, Digibyte, Waves, Siacoin, Monacoin, MaidSafe and many more have moved well beyond the core component of being a traditional currency and have built robust platforms for allowing the users to even transfer real-life assets including real estate and cards. Every cryptocoin uses a powerful blockchain for executing these transactions and recording them.
The word “crypto” in the phrase “cryptocurrency” is used because every single transaction involving digital currencies is completely encrypted for security purposes; this process is known as cryptography. The use of cryptography, in this case, is done for following reasons:
- To protect the transactions from being tampered with.
- To safeguard the identities of different parties involved in a transaction.
- To create fresh coins through mining.
The path to cryptocurrencies began in the 1980s. To protect the cash of gas stations and small shops, banks started developing and pushing the concept of point of sale. According to this idea, the customers were allowed to use a credit card in place of cash to buy products.
Nearly a decade later, a web-based payment system was developed and is still used today — PayPal. By using money online, the idea of moving traditional currencies between different end users gained momentum. PayPal further established the web’s credibility as a powerful medium of sending/receiving currencies. Afterwards, many similar services such as e-Gold and WebMoney were developed.
In the 2000s, right after e-Gold was shut down, cryptocurrencies began showing up in the cryptography community known as Cypherpunks. Many well-known personalities — Julian Assange who founded WikiLeaks and Jacob Appelbaum who developed Tor — were members of this community.
Unfortunately, not even a single cryptocoin from this community gathered enough momentum to push them into the world’s consciousness until 2008 — the year when Satoshi Nakamoto’s paper, “Bitcoin: A Peer-to-Peer Electronic Cash System”, was published.
In the following years, Bitcoin evolved as the top digital coin in different crypto exchanges. Bitcoins eventually gave way to hundreds of cryptocurrencies that were collectively known as altcoins. Some altcoins are more than simple coins and tweak the fundamental blockchain technology to reinvent website services and apps and tackle the crises of centralization.
Cryptocurrencies bring the power of decentralization. However, before jumping onto the concept of decentralization, you need to understand the real problems brought by centralization. If you look closely at the digital world around you, you will notice that you are a big chunk of information – including your personal details, your likes and dislikes, your bank details, and the like.
The data set — which you represent — is usually held by large private companies, public organizations, and the national government. The same data set is held on the servers of these big companies and institutions. So the data set is stored in a central location, and the information is centralized.
For instance, your financial record that includes all the transactions you have made, your current balance, and other related details are available on your bank’s server. So what if the server gets hacked? This will compromise your financial information because everything is stored in a single location. That is where a technology based on the concepts of decentralization helps; that is where blockchains come into play.
A blockchain is a big decentralized digital ledger that records every single transaction involving a specific cryptocurrency. Because a blockchain is the underlying technology backing every cryptocurrency, it is important to understand this technology in order to understand cryptocurrencies.
A block can be thought of as a page of a ledger that includes a list of transactions. Whenever two users send coins to each other, a transaction is created and the details of such a transaction are stored on a block. A block contains a specific number of transactions depending on the cryptocurrency in question. A transaction includes the addresses of the receiver’s and sender’s wallets and the amount involved in a transaction, among other things. When a transaction is added to a block, it becomes immutable — that is, it cannot be removed or edited. Once the block is filled with transactions, it will be verified by miners, and when a block is verified, it will be ready to be attached to the blockchain.
Once a block is verified or mined, it will be attached to the blockchain. The entire chain of blocks includes every transaction that has been executed in the cryptocurrency’s history. A block is given a unique identifier that also holds the previous block’s identifier.
The task of maintaining the credibility of a blockchain, verifying different transactions on a block, and adding blocks to the chain is done by miners. The miners need powerful computers that run specialized mining software to verify or process a block. These mining applications and computing technology are needed by miners to solve cryptographic puzzle that are necessary to process a block.