Are you interested in crypto currencies, but do not know all the details about them? Do not worry, we will explain all the necessary basics, which will help you fully understand the crypto currencies. We will start with the basic question, i.e. what are crypto currencies, and then we will analyse the issue in individual points with more easy to understand information.
What are cryptocurrencies?
First of all, let us answer this fundamental question with a more general explanation. Cryptocurrencies are digital or virtual currencies that use cryptography, a technique for secure and encrypted communication. Because of this security feature, most crypto currencies are impossible to counterfeit, although their security also depends on a number of other factors.
Most crypto currencies are decentralised systems based on blockchain technology. It is a public ledger, which is kept and updated by thousands of people (miners) around the world. All transactions are anonymous, but publicly available.
What is virtual currency?
Cryptocurrencies are fictitious currencies. These only exist on computers, as they are not tangible notes or coins within the system. Virtual money can be either centralised, where there is a central control over money supply, or decentralised, where control over money supply can come from a variety of sources. Each crypto currency belongs to the second category.
What is cryptography?
Cryptocurrencies are used to convert transaction data. One of the most famous devices for cryptographic communication is the Enigma, which was used during World War II. However, Enigma had a flaw and that is why the Allies were able to find a solution to decrypt its messages. However, note that the cryptography used in cryptocurrencies is still inviolable.
This is true at least for now and is expected to remain so for a long time, unless there is an unforeseen leap in the power computer. This technology allows the identification of a pair of cryptographic keys: a private and a public key.
What is a blockchain?
The blockchain is a form of distributed ledger technology characterised by transparency and stability. This is a store where all transaction data is publicly recorded. In order for a transaction to be recorded, consent must be obtained from the majority of the network. In this way, the network agrees on the validity of a transaction.
Therefore, blockchain is a solution to the problem of double costs. Transactions cannot be copied, which prevents the creation of new currencies out of nowhere.
What is mining?
Mining is a system of consensual distribution. When a user wants to make a transaction, everyone on the decentralised network receives a copy of that transaction. All members of the network must confirm this transaction and therefore the possibility of fraud is reduced/eliminated. Many people around the world are involved in network maintenance. Mining is a term used to validate pending transactions to be included in the blockchain.
This is how the chronological order of transactions in the blockchain is achieved. In order to be confirmed, the transaction must be embedded in a block, which will comply with the strictest encryption rules that are verified and validated by the miners of the network. No central government is involved in this process. This protects the neutrality of the Bitcoin network.
The process of creating new crypto currencies is called “mining”, as it has many similarities to gold mining. In both cases, it involves investing a great deal of work and energy, to produce a valuable product. In essence, Bitcoin miners are actually creating new Bitcoins as a reward for investing in computing power to maintain and protect the network.