What are cryptocurrencies?
It is an internet-based exchange that uses cryptography to complete financial transactions, as it is recorded in a ledger, usually a blockchain.
Cryptocurrencies make use of blockchain technology to gain decentralization, transparency, and immutability.
Cryptography is what makes cryptocurrency different from more popular forms of electronic payment such as credit cards or PayPal.
It is anonymous and cannot be traced back to its sender or recipient making it popular among people who want to hide their financial activity.
One of the most useful features of cryptocurrency is the fact that it is not under the control of any central authority, thus there is no intermediary like banks to transfer cryptocurrency between people, instead, it is controlled by its users and computer algorithms like blockchain technology to maintain its integrity.
It is possible to transfer cryptocurrencies from one person to another with ease without the intervention of banks and the currency is transferred with low transaction fees, thus users avoid the high cost of transfers that are imposed by traditional financial banks.
There are different types of cryptocurrencies that are supported by a decentralized network called the Blockchain.
This technology ensures that all electronic currencies are monitored regardless of whether they are stored in a digital wallet or used in trading.
To use this virtual currency, the user will need a payment network with accounts, balances and transactions.
While this process seems easy, there is an issue where the payment network has to prevent double spending i.e.
it prevents the user from spending the same amount twice, through a central server that keeps a record of the balances.
How cryptocurrency works
You can get cryptocurrency in two ways, by mining cryptocurrency or by exchanging it.
Cryptocurrency mining
Responsible for the mining process are the people who maintain the blockchain. They validate all transactions using software and hardware to solve cryptographic puzzles and get cryptocurrencies as a reward. This process also creates new coins at the same time. Mining requires a huge amount of computer processing power and electricity, So the mining costs often outweigh the cryptocurrency's gains.
Cryptocurrency exchange
The exchange takes place through a trading platform on exchanges where people can trade their currency for traditional money or other digital currencies, and where the “value” of different types of cryptocurrency is determined. The exchange also acts as an intermediary between people who want to buy and sell cryptocurrencies and charges a fee. on their exchange or take the difference between buying and selling prices as a transaction commission.
You can also trade them in a decentralized network, the blockchain, which is stored and transferred between cryptocurrency wallets that all have a private key to sign each transaction and a public key for others to validate the transaction.
Since it is in the blockchain, the transaction amounts are public but the information about who sent or received the transaction is encrypted. This makes the cryptocurrency an anonymous system, and it is impossible to trace transactions back to senders or recipients because the blockchain only has a record of each user’s public key, without knowing the private key of the account.
The user cannot determine who is behind a particular transaction.
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