Cryptocurrency for dummies, a simple explanation.
A cryptocurrency is an exchange medium just like money that can be used to pay for goods and services online. Cryptocurrency is a type of virtual or digital currency or in the simplest sense is money that can be used online only. There are currently many types of cryptocurrency online, with bitcoin being the first and arguably the most common type of cryptocurrency. Cryptocurrency is decentralised and created collectively by the whole system of cryptocurrency based on a pre-specified rate, made publicly known at the time of creation. The anonymous nature of cryptocurrency transactions makes them well-suited for a host of nefarious activities, such as money laundering and tax evasion. Currently, more than one thousand specifications of cryptocurrency are in existence. Most of them are derived from or similar to bitcoin, which is the first decentralised cryptocurrency that was fully implemented. The balance, integrity, and safety of the ledgers in the cryptocurrency systems are upheld by a community of parties that are mutually distrustful, known as miners. A cryptocurrency such as bitcoin is made up of peer networks. A cryptocurrency transaction cannot be reversed once it has been confirmed.
Cryptocurrencies have no physical representation like Paper money and are not controlled by any central governing bodies such as central banks. The cryptocurrency space is not as new as you may think for most people, digital currencies seem to be a fad that popped up two or three years ago.
To understand how cryptocurrencies work, it is important that we know some basics about these forms of electronic currencies. The network protocol has embedded incentives that motivate participants to contribute resources that power the network thus facilitating flow of the cryptocurrency and network support. Personal data of individuals trading cryptocurrency is kept safe and confidential, hidden from any third parties by a double key cryptography that requires public and private keys.
Each cryptocurrency has a dedicated team of developers and miners who ensure network support and develop the code to increase security and verify transactions. A lot of cryptocurrencies use the proof-of-work system which basically utilises hard-to-compute and easily provable computational problems which limit the exploitation of cryptocurrency. The wallet is a section of code that connects you to the network and allows you to access your choice of cryptocurrency. The value of cryptocurrencies is determined on exchanges just like you would the value of gold. Cryptocurrencies have brought a lot of change in many industries over the years that they have been in popularity.
“Bitcoin is exciting because it shows how cheap it can be. Bitcoin is better than currency in that you don’t have to be physically in the same place and, of course, for large transactions, currency can get pretty inconvenient.”-Bill Gates [Source: Bloomberg]