What Are Cryptocurrencies? — Ethereum (ETH) | Binance Coin (BNB)
Since the inception of Bitcoin and blockchain technology more than ten years ago, the public has gradually grown their curiosity and increased their interest in the topic. Many have asked, what are cryptocurrencies? Are cryptos like cash?
Secured by Cryptography
According to Binance Academy’s cryptocurrency for beginners, “A cryptocurrency is a form of digital cash that enables individuals to transmit value in a digital setting.” We have also discussed in previous posts the definition of cryptocurrency — a digital currency or virtual currency that is secured by cryptography. Cryptocurrencies basically encompass a wide range of digital money systems that rely on cryptography.
So what is cryptography? According to Techopedia, cryptography involves the creation of generated codes that allow information to be kept secret. By using cryptography, data can be converted into a format that is unreadable for unauthorized users and thereby makes it secure. Information that is secured by cryptography cannot be opened or read without the right key to decrypt it.
Apart from security, another thing that cryptography provides to the system of cryptocurrencies is repudiation or the property of being verified. Since information is secure, its integrity is also maintained while the crypto is stored and even while it is in transit. With the use of robust cryptography, digital currencies or cryptocurrencies ensure the protection of ownership rights. Cryptography aids in repudiation by allowing the verification of who truly owns the virtual currency.
Decentralized — Not Controlled by a Single Party
Another fact about cryptocurrencies is that they are not operated by a single party, entity, or institution. Unlike traditional fiat such as the yuan, dollar, and euro fiat currencies, cryptocurrencies are not produced by a centralized authority such as a particular nation’s central bank. Instead, cryptocurrencies are operated by a distributed network of participants that coordinate around a shared set of facts.
Most cryptocurrencies use blockchain technology which is a decentralized and distributed ledger technology that allows for the transparent and immutable (or unalterable) recording of digital assets.
By using a decentralized ledger technology, cryptocurrencies remove the unessential role of central banks and other middlemen in the traditional financial system. As Binance Academy interprets it, we can now forget about the distinction between bank and customer because every cryptocurrency user becomes his or her own “bank.”
To be able to have your own “bank,” you will need to launch your own node by downloading software that would allow the discovery of and connection between and among other computers that run the same program. When your node connects with other nodes, you are consequently creating a peer-to-peer network that broadcasts every transaction made to other participants in the network.
In the traditional financial system, banks keep a record or ledger of your balance and transactions. Whenever you swipe your debit card to purchase stuff at the store, the merchant essentially contacts your bank to check the balance and to ensure that you have the authority to complete the payment. The funds are not literally in your account. The payment only pushes through because the bank’s ledger verifies that the bank owes you money through your deposits. As they say, a few key players within the centralized entity can significantly affect your savings.
In contrast to the traditional financial system that depends on the role of banks, cryptocurrency transactions do not rely on any single entity but on the distributed network that is connected by nodes. The software automatically verifies the truthfulness of a transaction, thus the network will immediately reject any illegitimate transaction, thus preventing fraud from taking place.
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