In the current times, cryptocurrency has become a rage and everyone has started investing in crypto in one way or another. While some cryptocurrency coins have reached the moon some have fallen to the center of the earth.
Before you start investing in anything, it is best to know what it is, how it works, and what exactly you are putting your money in.
In this article, we will go through 6 topics that you must know to better understand the cryptocurrency world.
- What is Cryptocurrency?
A cryptocurrency is a form of digital currency which can be used as a medium of exchange i.e to buy goods and services. The main idea behind cryptocurrency is to remove the middlemen and make transactions directly without any third parties involved. In many ways, it is similar to cash and in many ways, it is not.
Cryptocurrency uses a lot of technology. Let's understand a few important ones.
2. What is Cryptography?
The “Crypto” in “Cryptocurrency” stands for Cryptography. Cryptography is a science of hiding text in such a way that only the person intended to see it can read the text. In Information Technology, it is mainly used to check whether the information passing through the internet has been altered in any form. Even if a single bit of input is changed, the whole encrypted text changes.
Cryptography is used in cryptocurrency to make it nearly impossible to make counterfeits and to prevent double-spending. Double spending is when a digital coin is spent more than once.
3. What is Blockchain?
Blockchain is a list of records a.k.a blocks. These blocks are linked together using cryptography. Each block has a cryptographic hash (encrypted data) of the previous block along with the transaction data and timestamp(date and time of transaction).
All the transactions ever made are stored in a list also known as a ledger. Every crypto holder has an identical copy of the ledger. Since everyone has a copy of the ledger, it cannot be altered and can be checked for authenticity by anybody with the coin.
4. What is Decentralized Finance?
Most of the financial products that you use today are controlled by a central authority. For example, cash is controlled by the reserve, stock prices are set by the exchanges. Whenever you need to use the money you have to go through banks, brokerages, etc.
Decentralized finance (DeFi) tries to use technology to remove intermediaries in financial transactions. You do not need bank accounts, brokerages, Identification, etc to use DeFi. It allows the sender and receiver to interact directly with each other. Cryptocurrency follows the principles of decentralized finance as it is not regulated by any authority.
5. What is Peer-to-Peer Technology?
Peer-to-Peer(P2P) technology is a decentralized network in which a group of devices is connected to each other. Each device acts as an individual server. There is no central authority, every user has equal power and performs equal tasks.
If you have ever downloaded anything using a torrent, then you have used P2P networks. It uses P2P technology so that you don't have to rely on a single source to download your files. Everyone who has that file you’re downloading becomes a server.
P2P in crypto means the transfer or exchange of digital assets directly without the need of any middlemen or authority.
6. What is Cryptocurrency Mining?
Cryptocurrency mining is the process of validating the blockchain. Computers are used to solve highly complex hashing puzzles to add blocks to the blockchain. It is called mining because similar to mining it requires a lot of hard work done by computers(hashing) and it increases the cryptocurrency(resource).
Since there is no central authority that maintains the blockchain, it is incentivized in such a way that it is beneficial for random people to maintain it. Miners receive newly generated coins that are registered on their wallets, for their resources and time spent on maintaining the blockchain.
Cryptocurrency is a currency backed by leading-edge technology. Even though there is no surety that cryptocurrency would be the future of currency, but the technology used will definitely form the foundation of next-generation financial instruments.
Thank you for reading!