What is the definition of a cryptocurrency? The popularity of cryptocurrencies is rapidly growing, and we will not debate whether this is a good or negative thing in this blog. We’re not even going to discuss whether you should buy it or not. The goal of this blog is to provide a clear and basic explanation of the notion of cryptocurrency. This site is for people of all ages, from children to the elderly, and from complete novices to those who have been using cryptocurrencies for years.
Let’s begin with a definition. Cryptocurrency is a digital money in which transactions are validated and records are kept by a decentralized system employing encryption rather than by a centralized authority, according to Oxford languages. This may not make a lot of sense, but don’t be put off by it! By the end of this article, you’ll know precisely what we are talking about.
This description contains three key concepts: ‘digital currency,’ ‘a decentralized system,’ and finally, ‘cryptography.’ Let’s start with a definition of the word “digital currency.” It may seem self-evident to some, but let us strive to grasp the concept properly. It’s all about the cash! Consider money as a concept. A currency that can be used to buy and sell products and services. You’ll need money to buy groceries, for example. The currency would be a physical manifestation of that idea. Food would be purchased with bills or coins as payment.
We’ve seen currencies come and go in a variety of shapes throughout history. Shells, coins, banknotes, and plastic money are just a few examples. Digital currency is the newest kid on the block. A digital currency is a type of money that is handled, stored, and exchanged mostly by computers. They are, in essence, traditional currencies. They don’t have a physical shape in general, which is a significant difference. You might be wondering what they look like in real life.
To address that, we must first examine the decentralized system more closely. Traditional or fiat currency, such as the dollar, is a centralized kind of money. A recognized government entity usually backs and manages it. The Federal Reserve System of the United States of America, for example, is the country’s central financial system. One of the system’s problems is that we have no choice but to trust them and hand over control of our finances and personal information. The word “trust” is crucial here. I’m going to utilize your phone’s banking app to demonstrate this. You may see your transaction history when you open it. This list contains every transaction you’ve ever made. When you give money to a buddy, your balance drops while your friend’s balance rises. The bank is in charge of this, and it happens automatically. You or anyone else cannot update or amend the transaction list, nor can you or anyone else change your balance. One of the primary functions of a bank is to provide financial services. Essentially, they handle and safeguard our funds, and we have little choice but to trust them. But what if I told you there is another option? We, the people, are in charge of authenticating and confirming transactions in this system. A peer-to-peer technology that eliminates the need for trust.
Welcome to the world of cryptocurrency! Please be aware that the following section may be daunting. Don’t worry, it’ll just take a minute, and I’ll summarize everything in a few phrases at the conclusion. As a result, the system that I’m discussing could be represented by a game of poker. Imagine a four-player poker game where no one brought any chips or money. Instead, on a sheet of paper, each of the four players keeps note of who bets what, who wins, and who loses. At the end of each round, the players review their notes to ensure that no one has committed a mistake. Whether on purpose or not. If someone makes a mistake, it is corrected, and the game begins once everyone has the same notes. This is similar to how the Blockchain operates. This is a term you may have heard before. “A blockchain is a distributed, decentralized, and frequently public digital ledger.”
Let’s simplify definitions because they’re virtually usually too complicated. Consider the Blockchain to be the cryptocurrency’s transaction log. On the Blockchain, every transaction, from the earliest to the last, is recorded. Consider sending a pal 50 bitcoins all the way back in 2009. On the Bitcoin Blockchain, this would still be visible. That was, in reality, the first ever recorded transaction, and here it is. Of course, none of this is novel or impossible to accomplish with Excel. The part that’s intriguing is when it comes to management.
Please bear with us; this entire section may have been a little overwhelming. Let’s take a step back and review everything we’ve learned so far. Everything comes down to the following. When it comes to traditional currencies, there is always a central bank in charge. They protect the network by ensuring that transactions are confirmed and that no one cheats. A decentralized network does this duty with cryptocurrency. We won’t have to rely on the bank to keep our money safe this way. We no longer have to rely on them; we can now independently verify and authenticate everything that occurs with our money. This is a simplified diagram illustrating how a group of people might form an untrustworthy network.
In a future article, we’ll delve deeper into this subject. So don’t forget to subscribe! You now have a basic understanding of how the blockchain works.
We’ll respond to the previous question: What is a Cryptocurrency and how does it work? The problem is that you can’t truly own a cryptocurrency. It only exists on the Blockchain as a record. Assume you have a bitcoin balance in your digital wallet. This means that someone sent you one bitcoin and there’s a record of it someplace on the Blockchain. We now know what a decentralized network and digital currency are. At the very least, we hope so! That takes us to the final jigsaw piece: cryptography. The art of writing or solving codes is known as cryptography. The word crypto is derived from the Greek word ‘kryptos,’ which meaning “hidden.” It ensures that information is kept private between the sender and the intended receiver. Cryptocurrency is a type of digital currency that resides exclusively on your computer. From mp3 to jpg, we can copy practically any file we can think of. So, what’s keeping us from duplicating cryptocurrencies? Assume you have a digital wallet with a two-bitcoin balance. Cryptography is employed to ensure that only you have access to the coins in order to complete this task. A public and private key scheme is used in cryptocurrency. Don’t worry if you’re unfamiliar with these notions; they’ll become evident soon enough. Everyone can see the public key, which is used to encrypt data. Encryption is a mathematical technique for rendering data unreadable. The private key, on the other hand, is kept in your wallet and is used to decrypt information. A private key looks like this, and it should be kept confidential at all costs. You’re probably wondering what those keys are for and what you do with them at this point. With the following example, perhaps it will become evident. Let’s pretend you want to send a private message to Janice. You may make your communication unintelligible by encrypting it. Encrypting a message like ‘Hey Janice’ with Janice’s public key would result in something like this. Nobody, not even Janice, will be able to read this message. She does, however, have access to the message’s private key, which is linked to the public key that was used to encrypt it. Janice’s secret key, which only she has access to, would translate the message back to ‘Hey Janice.’ That’s fantastic news for you and Janice, but what does it mean for cryptocurrency? A public and private key can also be used to create digital signatures.
You use a signature to confirm it’s actually you, just like in real life. Let’s say you wanted to send Janice two bitcoins. A Bitcoin address is used to store these bitcoins. You may generate a bitcoin address with a bitcoin wallet and use that address to store your cryptocurrency. It’s similar to a bank account number. To prove to the decentralized network that you control a specific Bitcoin address. When you sign a transaction, you utilize your private key. The transaction can then be verified by everyone in the network by comparing the signature to your public key. This may be a little confusing at first, but just remember that a private and public key, as well as a bitcoin address, are all linked and utilized to ensure that no one cheats. A Bitcoin wallet is used to create a Bitcoin address, which also includes the creation of a public and private key. This is a quick overview of how cryptography is applied to cryptocurrency. There are many more applications, and we could go into great length about them in a future article, but we’ll reserve that for another time. The essential message here is that cryptography is used to secure cryptocurrency. So there you have it, my attempt to explain Cryptocurrency. It’s always difficult to convey the concept since its genius is in its simplicity. There are an infinite amount of ways to explain it, and the trick is to avoid making it too complicated. Which is a surprise challenge!
Comprehending the three principles covered is the essence of this article and the key to understanding Cryptocurrency. Cryptography, digital currency, and a decentralized system I could write multiple posts on each of these issues, but we decided to start with a broad overview. We hope that this blog has clarified things for you. Don’t be surprised if you wind up with more questions than you started with. Hearing about these ideas is a terrific place to start and a fantastic approach to begin investigating. At the very least, you now know where you should focus your investigation.