Decrypting CRYPTOCURRENCY
“Modern technologies are 99 percent bravery, and 1 percent investment”
TL;DR: Cryptocurrencies are electronic peer-to-peer currencies. They are an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions. They don’t physically exist. You can’t pick up a bitcoin and hold it in your hand, or pull one out of your wallet.
How Cryptocurrency was Invented?
In 1826, John Walker noticed a dried lump on the end of a stick while he was stirring a mix of chemicals. When he tried to scrape it off, voila, sparks and flame. Jumping on the discovery, Walker marketed the first friction matches as “Friction Lights” and sold them at his pharmacy. And that’s how mankind learned to control fire on the tip of their fingers.
Satoshi Nakamoto, the unknown inventor of Bitcoin, the first and still most important cryptocurrency, never intended to invent a currency.
He wanted to build a decentralized digital cash system. Many people had tried to create a decentralized cash system in the ’90s but all of them had failed. Satoshi now decided to build a digital cash system without a central entity. He succeeded. This decision became the birth of cryptocurrency.
Satoshi Nakamoto invented the bitcoin software in October of 2008 and made it an open-source in January of 2009. And in 2010 Satoshi disappeared. His actual identity is still unknown.
How does cryptocurrency work?
Cryptocurrency transactions are sent using software called cryptocurrency wallets. The person who creates the transaction uses the wallet to transfer balances from one public address to another. This currency is regulated by math rather than by governments.
This technology is decentralized. In simple terms, this just means there isn’t a data center where all transaction data is stored. Instead, data from this digital ledger is stored on hard drives and servers all over the globe. The reason this is done is twofold:
1.) it ensures that no one person or company will have central authority over virtual currency.
2.) it acts as a safeguard against cyberattacks, such that criminals aren’t able to gain control of a cryptocurrency and exploit its holders.
What is a blockchain?
Blockchain is literally just a chain of blocks, but not in the traditional sense of those words. When one says the words “block” and “chain” in this context, he/she actually talks about digital information (the “block”) stored in a public database (the “chain”).
How it works:
Lets’s assume a scenario where you buy a product from Flipkart. In order for a block to be added to the blockchain, four things must happen:
- A transaction must occur. Instead of using your actual name, your purchase is recorded without any identifying information using a unique “digital signature,” sort of like a username. A block will group together potentially thousands of transactions, so your Flipkart purchase will be packaged in the block along with other users’ transaction information as well.
- After making that purchase, your transaction must be verified. With blockchain, this job is left up to a network of computers. When you make your purchase, that network of computers rushes to check that your transaction happened in the way you said it did. i.e they confirm the details of the purchase.
- After your transaction has been verified as accurate, it gets stored in a block. The transaction’s amount, your digital signature, and Flipkart’s digital signature are all stored in a block. There, the transaction will likely join thousands of others like it.
- That block must be given a unique, identifying code called a hash. The block is also given the hash of the most recent block added to the blockchain. Once hashed, the block can be added to the blockchain.
When that new block is added to the blockchain, it becomes publicly available for anyone to view — even you.
Is cryptocurrency hack-proof?
The currency that has no physical form and only exists in digital form certainly raises a sense of doubt among the investors, if the blockchain process is safe or not?
Each computer in the blockchain network has its own copy of the blockchain, which means that there are thousands, or in the case of Bitcoin, millions of copies of the same blockchain. After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block. That’s because each block contains its own hash, along with the hash of the block before it. If that information is edited in any way, the hash code changes as well.
Let’s say a hacker attempts to edit your transaction from Flipkart. As soon as they edit the amount of your transaction, the block’s hash will change. The next block in the chain will still contain the old hash, and the hacker would need to update that block in order to cover their tracks. However, doing so would change that block’s hash. And the next, and so on. In order to change a single block, a hacker would need to change every single block after it on the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power.
How many types of cryptocurrency are there?
There are now more than 3000 cryptocurrencies in existence, with each falling into one of the three major categories: altcoins, tokens, and Bitcoin
Bitcoin
The first and most famous cryptocurrency, Bitcoin serves as a digital gold standard in the whole cryptocurrency-industry. It’s a global peer-to-peer electronic payment system that allows parties to transact directly with each other without the need for an intermediary such as a bank. After seven years in existence, Bitcoin‘s price has increased from zero to more than 650 Dollars, and its transaction volume reached more than 200000 daily transactions.
Altcoins
Altcoins works much like the original Bitcoin. Using a private key, you can send a payment from your digital wallet to another user’s wallet. The majority of altcoins are just alternate versions of Bitcoin with minor changes. That’s how they got the name ‘altcoins’.
Some altcoins use different algorithms for Bitcoin. For example, Factom is an altcoin that uses PoS (Proof of Stake). In PoS, there are no miners. Instead, there are stakers.
Another eg is Litecoin that will produce coins every 2.5 minutes as compared to bitcoins 10-minute stat. This makes Litecoin able to process payments faster.
A few examples of altcoins include Ethereum, Ripple, Dash, NEM, Monero.
Tokens
Unlike Bitcoin and Altcoins, tokens are not able to operate independently and are dependent on the network of another cryptocurrency. That means they do not have their own underlying DLT or blockchain, but instead, are built on top of an existing cryptocurrency’s blockchain.
