Everything You Need To Know about What is Cryptocurrency [Ultimate Guide]
Cryptocurrency has now become one of the most crucial digital terms.
It wont be wrong to state that all the financial institutes such as banks, central authorities, and accounting firms have conducted an extensive research on the working Cryptocurrency and how it aims to provide benefits to the parties involved in the money transaction process.
You must be thinking that what is Cryptocurrency and why financial institutes are so concerned about its working?
Cryptocurrency is a virtually encrypted currency which is backed by the security of cryptography.
The basic purpose of Cryptocurrency is to facilitate the easy transaction of money from one party to another and to keep a keen eye on the generation of currency units.
Cryptocurrency is one of those financial terms which aims to reduce the involvement of financial institutes in the transaction process.
You all must be aware of the fact that banks and financial intermediaries charge a huge amount of money before conducting any sort of monetary transaction. Cryptocurrency was introduced to solve the very similar problem.
It wont be wrong to state that originators of Cryptocurrency are still widely unknown however, some sources believe that foundations of cryptocurrency were established by Satoshi Nakamoto in 2008.
Now if we talk about the need of Cryptocurrency and how it aims to facilitate its users then, it is quite interesting to see that origin of cryptocurrency is directly connected with the digital cash system.
Since many years, a number of banks were trying to introduce the facility like cryptocurrency however, they failed to do so because of the system limitations and keys encryption process.
It is interesting to see that initially Satoshi and his group also focused on the centralized digital cash system and because of the very same reason they failed to establish the appropriate foundations of the digital cash system.
Soon after his first try, he realized that a viable digital cash system cannot be operated under the centralized system. Though it is true that decentralization of the digital cash system decreases its overall security, however, this problem is relatively solve-able in nature and can be corrected with the proper encryption of public and private keys.
As online money has become one of the most things, therefore, it was highly crucial to introduce a technology which is capable of storing and transferring the money digitally in a secure manner.
Though it is true that many banks still facilitate the online payment process, however, the steep fees charged by banks are capable of eating up the entire share.
Cryptocurrency was launched with the vision of providing less expensive yet highly secure transaction platform to those individuals who are interested in the working of digital currency and its attached units.
As cryptocurrency is the digital currency system, therefore, it does not consist of any sort of physical money. All the transactions of cryptocurrency are done on the basis of coins, which are transferred and even stored in the virtual wallets.
The worth of cryptocurrency units is determined with the help of baseline. Normally, the US dollar is treated as the baseline and is used to compare the value of the other currencies.
Once the accurate value of the currency is identified then, next step is all about the creation of cryptocurrency units during the transaction process which is further backed by cryptography.
It is highly important to understand that the word cryptocurrency itself is a huge phenomenon, which is further divided into different units.
For getting information about some of the key concepts of cryptocurrency, continue to read on.
In literal terms, cryptography is basically the way of writing computer based codes, however, when it comes to the contextual meaning then, cryptography refers to the process of key encryption (public and private) which is used to monitor the procedure of coin creation and their transaction verification of cryptocurrency.
Cryptocurrency ledgers is basically a database, which is also called as transaction block chains in the language of Bitcoin are used to update and store the identities of those people who are making the confirmed unit transactions.
It is important to understand that the records of the transaction makers are properly encrypted, however, the records of the transactions are publicly shared with all the users for the proper verification process. The basic purpose of cryptocurrency ledgers is to keep a check on the balance of the digital wallets and identify a number of coins that can be spent.
Moreover, these public ledgers are also used to avoid the chances of any sort of scam because they tend to keep a check on the new transaction and the units of coins involved, in respective with the digital wallets.
Transaction process can be called as the initiator of exchange, which facilitates the transfer of coins in between the digital wallets.
Before the confirmation of transfer, the data is posted on the public ledgers to perform the basic tasks such as verification of accounts, and a number of coins requested.
It is interesting to see that all the data posted on public ledgers can be reviewed with the help of hex editor (the binary file reader) however, if you are interested in viewing all the technical data such as transaction history, acceptance procedure and monitoring of the current rate through a more viable source then, it is recommended to use blockchain browser.
Once all the data is properly stored in the public ledgers then, next step is all about waiting for the confirmation. During the confirmation process, the digital wallets start the encryption process with the help of cryptography, which consists of the mathematical signatures of the transaction maker.
The purpose of encryption or mathematical signatures is to ensure that transaction is made by the valid owner and they consist a spend-able amount of coins in their digital wallets.
Once the encryption process is done (normally takes 10-15 mints) then, next step is linked with the mining of public ledgers.
It is important to note that there is a huge difference between the transaction process and confirmation of the transaction.
When any coin owner starts the transaction then, public ledgers are used to perform the work of scrutiny and once its done then, next step leads to the confirmation and extraction of coins from the digital wallets.
If you are thinking that mining process is similar or confirmation process is all about just accepting the transaction requests then, you are wrong.
When an owner requests the transfer of coins or posting on the digital wallets then, certain mathematical algorithms are needed to be solved by the miner.
It is interesting to see that mathematical algorithms are highly complex in nature and their complexity tends to increase in a rapid speed. These algorithms are basically the strong mathematical computations and are designed to increase the security of the coins.
As mining is open for everyone, therefore, the algorithms are used to ensure that not every miner is capable of adding the blocks in the blockchain for the confirmation process. Moreover, this process also aims to ensure the fact that not all coins belong to the one miner.
Once the miner successfully solves the puzzle then, next step is all about the updating of the ledger.
If miner become successful in updating the ledger and transferring the blocks then, small amount of is provided to the miner, which is further backed by the subsidy (on the creation of new coins)
It is important to understand that mining is not an easy task because its basic purpose is to minimize the chances of double spending and to keep an eye on those users who are trying to double use the invested coins.
Mining is one of the most crucial parts of cryptocurrency because this process is actually responsible for giving value to the generated coins. The entire mining process is backed by the proof of the work.
The two major players of proof of work system are known as blocks header and the target. If you become successful in dragging the value to the target or even lower the header then, peer network will start accepting the transactions.
However, the working of proof of system is not easy as it seems because this entire processing is revolving around the concept of probability and if you are interested in hitting the right number then, you are no doubt supposed to play around a hundred of times for the desired results.
You must be thinking that whats the right away of understanding the difficulty level of mining and how it impacts the rate of block creation.
Well, cryptocurrency is all about using your brain and then, following the past trends for predicting the future.
If you are interested in gaining information about the difficulty level then, you need to look for the past transactions in the public ledger. For instance, you can identify the difficulty level after 2016 blocks had been placed.
According to the cryptocurrency researchers, the giants players like Bitcoin tend to change the difficulty level after 2016 blocks and it can be measured by applying the formula on the hash value and the target to be achieved.
The target which is needed to be achieved is usually based on the 256-bit numbers, however, this number is dependent on the joining of miners. For instance, if more miners are trying to perform the mining for the same transaction then, block generation rate will eventually go up thus making it difficult for individuals to hit the target.
It is important to understand that the calculated value of difficulty might not be very accurate in nature however, it can be used for generating the rough idea about the upcoming requirements of the blockchain.
If you are worried about the miners with malicious intents then, you need to understand the fact that working of cryptocurrency is backed by the proper network.
When one miner with malicious intents try to hit the difficulty and become successful then, all of his efforts are rejected by the peer network thus making the process zero. This system makes it pretty evident that each and every miner is supposed to full fill the requirements before starting the mining process.
Before Starting the discussion about the reward, I would like to highlight the fact that there are basically two parties involved in the process of the blockchain.
The first person is the one who is responsible for identifying the block in the blockchain. That person is called as the discoverer.
However, the person who is mining the block is different from the discoverer and his rewards are also different.
As discussed above, the miner is rewarded with the subsidy for solving the puzzle and the processing fees.
However, it is interesting to note that the fees of miners are dependent on the number of blocks they launch. For instance, if they become successful in mining more blocks then, their fee will automatically go up.
On the other hand, if the block is successfully discovered by the discoverer then, a certain amount of coins are provided to the discoverer on their success. The current amount of coins are provided are 12.5 bitcoins, however, it is important to note that this number might also vary with the change in difficulty level.
You must be thinking that whats the reason behind rewarding the discoverer when the complex task is being performed by the miner?
Well, here is the logic.
Discoverers are those people who are actually responsible for identifying the blocks based on the transactions. You must understand this concept like, if there are no blocks then, miners basically have no work to perform.
Discovery is the pre-requisite of mining and it should be performed with sheer perfection.
It is important to understand that cryptocurrency is basically a system which works on the principles of scarcity.
For instance, miners are responsible for generating the coins in the system and their scarcity is responsible for changing their value. This theory can easily be understood with a demand for gold in the realistic market.
For example, when golden prices are low in the market then, people start investing their money on it. Due to the low prices, the demand for gold increases which eventually causes the decrease the supply of the material.
Now when demand is boiled up then, producers start charging high amount thus leading to the change in the overall value of gold. It is important to understand that change in the value is not introduced by a single producer, however, the entire market participants in the decision-making and then, change the value of the gold.
Same happens in the market of cryptocurrency, however, instead of physical buying and selling procedure the transactions are made online and posted on the public ledger which is further approved by the entire network of the miners.
In simpler terms, the market of cryptocurrency is just like the foreign exchange and works in a similar manner. The extra units generated are always the reward for those people who are investing their money and expertise in the overall prediction process.
We do understand the fact that initially, it is difficult for people to digest the working process of cryptocurrency, however, once you start learning the basics of the system and start practicing it then, it gets easier with the passage of time.
Now, I would like to talk about some of the mining terms and how they tend to impact the entire mining process.
If you are interested in the working of cryptocurrency work system then, you must have heard about the cryptocurrency hashes and their working mechanism.
Well, if you are still confused about its working then, read on!
Cryptocurrency hashes are basically the computerized mathematical algorithms that aim to extract the data of a certain size as input which is further processed with the help of valid operations and then, a fixed output is generated for the meaningful use.
It is important to understand that the major function of cryptocurrency hashes is to gain information about the passwords and store them accordingly. Because of the very same concept, the working of cryptocurrency hash is not just limited to mathematical algorithms however, it also aims to impact the security of the stored data.
Now if we link the concept of mining with cryptocurrency hashes then, this function is used to determine the overall mining power based on seconds. It is important to understand that every time a miner become successful in solving the block then, new hashes are generated which are further processed for the generation of fixed length output.
This phenomenon is easy for coders to understand because coding is all about breaking or solving a number of hashes for the sake of data extraction. Same sort of formula is used in cryptocurrency hashes and is used by the miners for solving the algorithms for a successful transaction.
However, the transactions or algorithms which are being solved by the miners arenot confirmed in nature. Moreover, some people believe that small change in theoverall value of the hash wont impact its entire output, however, it is important tounderstand that a small change is no doubt capable of altering the proof of workthus resulting in the failure.
If you are interested in less failure attempt backed by the probabilitythen, you should also keep a keen eye on the working of hashes and how they areprocessing the input into fixed output.
Scrypt and SHA are both the valid components of hash function however, theydiffer from each other based on the level of difficulty involved.
As discussed above the entire working of cryptocurrency is dependent on thealgorithms which are responsible for the solving of blocks. Since mining is an opensource task, therefore, the high difficulty level is required to avoid the chances ofany fraud.
According to the cryptocurrency experts, SHA which is also abbreviated as SecureHash Algorithms with series 2, is backed by the highly secure encrypted keysknown as cryptographic functions.
It is important to understand that SHA-2 is designed by the National securityagency and they are operated on the digital data.
This function not only helps in solving of the complex security algorithms,however, it also aims to make the user aware of any changes made in thedownloaded files. For instance, if someone has tried to alter the algorithm filesduring their solving process then, the factor can easily be identified with SHA-2.
Moreover, SHA-S is said to be one of the securest systems because of its inputprocessing system. For instance, only one value is assigned to the single inputwhich is further responsible for the generation of unique hash.
In this way, it is relatively impossible for any person to malicious change thehashes associated with the block codes and use them for causing corruption.
On the other hand, if we talk about Scrypt then, this hash function is not used bythe majority of cryptocurrency however, it is still pretty famous amongst the usersof cryptocurrency.
The working of the Scrypt is basically backed by the password-based system andaccording to a number of researchers, the system of scrypt not highly secure innature, however, it is still capable of consuming a lot of time with money.
It is interesting to see that before the advent of SHA-2, many software companiesused to work on the principles of scrypt because they had no option. However,when SHA-2 was introduced in the market then, companies got the chance ofusing a less expensive coding system and they took the full benefit of theopportunity.
If we look at the entire workability of scrypt then, it is clear that scrypt isnt a badcoding system however, it is important to understand that during the algorithmsolving process, a number of computer intensive programs are running in thebackground and they need the right operations.
When software companies used scrypt, at that time, they faced the difficulty ofmanaging the background programs however, SHA-2 was introduced to solve thevery similar problem and now it is used by a number of cryptocurrencies.
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