It was not too long ago when the news about the young boy who made big bucks with Bitcoins broke out. And it was not too long after when a surge of people started to ride the wave of cryptocurrency. Cryptocurrency is slowly and then all at once taking over the world. So much so that even big banks, software companies, financial firms, and insurance agencies are looking into it – some are even getting into it.
Despite its global recognition, however, a great majority of people still don’t have a clue about what cryptocurrency is and how it works. If you belong to this group, then read on and maybe learn a thing or two.
What is cryptocurrency?
Cryptocurrency is very complex – complicated, even. However, if stripped off of its technicalities, can be dumbed down to an explanation that even a 5-year old can easily understand. In an article by Nik Custodio, he explains cryptocurrency with the aid of an apple.
He asks you to imagine me holding one apple. I give you my apple, leaving me with nothing. The apple is now yours. You can do whatever you please with it. I, on the other hand, no longer have control over it. The transfer of possession is physical. We both know it happened. We were both there and we didn’t need a third person to help us confirm the transfer. This is called an in-person exchange.
Now, imagine the apple is digital and I give you that digital apple. How, then, do you know that the apple is really yours and only yours? What assures you that I didn’t send it to other people or that I made a thousand copies of it for my self? Or maybe I uploaded a copy for a million people to download.
Exchanging digitally doesn’t look as easy as exchanging physically, does it? This problem, called the double-spending problem, is what “Satoshi Nakamoto” wanted to solve with Bitcoin. Bitcoin, like other cryptocurrencies, is a decentralized digital cash system which means that there is no central entity to keep track of all the transactions within the network and to make sure that the account balances check out. Rather, what cryptocurrency is is a peer-to-peer network where everyone in the network has a record of all the list of transactions, thus the balances, to validate future transactions.
How does cryptocurrency work?
What is mining and who are miners?
A transaction (i.e. John gave 5 bitcoins to Adam) is sent throughout the network once it is signed by the source of the transaction. After the transaction is completed, it still has to be confirmed within a specific time frame. Transactions can only be confirmed by miners. The security and integrity of the system lies in the hands of miners. Miners are responsible for endorsing transactions and sending them across the network. Anyone in the network can be a miner since anyone can confirm a transaction. However, the only real qualified ones are those who can “solve” a complex “computational problem”, such as finding a way to link the new block of transaction to the old blockchain.
Properties of cryptocurrency
Cryptocurrency: Just another fad or the money of the future?
One really good feature of cryptocurrencies is that they are free of control from the government or any political agenda. And this is probably why cryptocurrencies are attractive to people.
Despite the great number of people who do not understand cryptocurrencies, a great majority has already caught on – and a lot of people are also already starting too! And major banks, financial institutions, and governments are starting to feel threatened to lose their power and control over national currencies.
With its potential to retain or increase its value, without risking devaluation, cryptocurrencies are the game changers we thought we didn’t need.