What are cryptocurrencies and how do they work?

Experto - MegaAcademy
Experto - MegaAcademy

INDEX

  1. What are cryptocurrencies?
  2. History of cryptocurrencies
  3. What is blockchain?
  4. How do cryptocurrencies work?
  5. Crypto Mining and Miners
  6. What happens when I use a cryptocurrency?

You’d have to live disconnected from the world to not have heard, or read, at least once about cryptocurrencies. Whether the information would have given you a positive or negative impression, you will know at least that they are currencies that were born in the digital world, that they are not paper currency like the money that you are used to manipulating and that, in addition, their price can be very high.

1. What are cryptocurrencies?

A cryptocurrency is a computer algorithm created with the function of representing a unit for making trades. If you wanted to visualize it, it would be something like a set of letters and numbers, a sequence of data, very similar to seeing a programming code on the screen.

Cryptocurrencies are digital currencies. They do not have a physical form, but they do have commercial value, this thanks to the use and accepted as a means of payment in transactions.

2. History of cryptocurrencies

what are cryptocurrencies

The existence of cryptocurrencies has its theoretical antecedents in cryptography, a technical branch of knowledge, which stems from the ancient need to create hidden messages through codes. Which was strengthened immensely with the development of computer science.

In the eighties and thanks to the arrival of the internet, which opened a new scenario of technological interaction and a virtual space for communication, cryptography enthusiasts began to raise the possibility that people could make transactions through the network. For that, it was necessary the existence of a digital currency, which could move in that same medium, which would later give the added value of operating globally.

Additionally, they considered that it should be encrypted so that it would be secure and that it would not be subject to the control of banking entities, that is, it should be decentralized. Obviously this also implied that no government was going to rule over it, it was something like proposing a “free money” that, thanks to technology, could operate for the benefit of the people.

But it is only until 2009 that the first cryptocurrency, Bitcoin, was born, this because the creation and development of the software that allows the existence of these currencies, the Blockchain, required a very broad theoretical compilation.

Another curious fact is that just in 2010, a year later, Bitcoin was used for the first time to make a payment related to the physical world; the purchase of two Papa John’s pizzas in the United States. That is, until that date its existence and use was limited to small groups that allocated the cryptocurrency to private trials, so it still had no commercial value.

3. What is Blockchain?

what are cryptocurrencies and the blockchain

The blockchain is thefundamental element for the existence of cryptocurrencies. As its name indicates, they are a sequence of blocks, where each one contains the information of the operations performed, but additionally, it also indicates which is the previous block and links to the next. That is, it works as a kind of accounting book, within which each block represents a sheet with information, linked to the previous one and indicating which one should follow.

The great advantage is that the information stored there is that it cannot be modified, because as there are thousands of nodes (computer terminals) that receive a copy of the Blockhain, as soon as a data is modified an alert would be generated, because this network works by consensus, this means that most of the copies must have the same information, so when a change is detected the network points it out as an error. Additionally, to commit fraud, it would be ridiculously complicated, if not impossible, to convince most of the nodes (51%) to change their copy as well. This gigantic peer-to-peer network stretches across the globe.

4. How do cryptocurrencies work?

For the operation of cryptocurrencies again we must mention the Blockchain, remember that its way of operating is public and with this it is guaranteed that transactions are traceable and transparent. So every time a transaction is made with a cryptocurrency, for example a payment, the transaction information is sent on the network (the data of the crypto address of the sender, receiver and amount of coins to be sent) is confirmed and through a process called mining, which is carried out by cryptocurrency miners, the information is added within a new block of the chain. This obviously happens in a matter of seconds.

5. Crypto Mining and Miners

what are cryptocurrencies and their mining

Miners are people who have powerful computer equipment with which they check that the information contained in the blocks of a crypto is true. Such use of resources generates a reward in cryptocurrencies, but more importantly, this public audit action makes it impossible to modify the information contained in the Blockchain. As data is transmitted on the network and constantly verified, an alteration would be easily identifiable. Additionally, thanks to miners, new cryptocurrencies are generated, so the more transactions are made with a coin, the more profitable it is to mine.

It is important to mention that miners know how crypto works and believe in the system, so it would also be difficult to “bribe” them to change the information. In short, mining keeps the system safe.

6. What happens when I use a cryptocurrency?

For the end user to send, receive, buy, sell or exchange cryptocurrencies is a process similar to paying with a local currency through a virtual account. Now, the difference is that it requires specific applications that have greater security measures, in addition there are also platforms specialized in exchanges such as Exchanges and P2P trading platforms.

In any case, the mining process to confirm the transaction happens in a short time and without the user of the cryptocurrency having to make any kind of additional effort or operation.