Your Ultimate Guide to Understanding Cryptocurrency and How It Works — Should You be a Part of It?

People talk about Cryptocurrency like they understand what it is, but in the real sense, they don’t. Not long ago many financial institutions were investing in research about Cryptocurrency.

In this guide, I am going to explain to you what Cryptocurrency is, its origin, and how it works, and also why you should use it. I will also introduce some of the famous Cryptocurrencies.

What is Cryptocurrency?

I could tell you that Cryptocurrency is the future money, or do I say the next generation currency? And yes, it is the future of currency, if anyone understands.

Cryptocurrency is a type of digital currency or money that was designed to be highly secure and mostly anonymous. While using Cryptocurrency, you can rest assured that your transactions are safe, and your address, unlike in a bank account, can never be compromised. No threat of hackers.

The Origin of Cryptocurrency

Not everyone knows this, but Cryptocurrency was born as a result of another invention’s error, to say it the most straightforward way possible. The inventor of the very first, and still the most famous form of Cryptocurrency, the Bitcoin, never intended to create a currency.

In 2008, Satoshi Nakamoto, the name used by the unknown inventor, or inventors of Bitcoin said that he was developing a “Peer-to-Peer” electronic system of transacting with cash to avoid double spending.

Succeeding in his invention and creating a decentralized transaction system, Satoshi managed to do something that many people failed to accomplish in the nineteen nineties. It was a one of a kind invention that is going and has already started revolutionizing the way we transact.

Satoshi had watched as many inventors tried and failed miserably to create a centralized digital cash system. We’d say that he didn’t want to fall into the same pit, so he used a different route. As they say, if you’re going to achieve different results, you must change the formula. So Satoshi decided to develop a decentralized system, which led to the birth of Cryptocurrency.

For a digital cash transaction to take place, there needs to be an account, owned by someone, and with sufficient balance. These accounts are controlled from one central server, in which all account details including balances and past transactions are kept. You as the account holder have no control over it.

The main aim of creating a digital money system was and still is to eliminate double spending by the entities, and to give the world control of their money and the power to control how they transact. This proved unachievable with the centralized server system.

But Cryptocurrency made it possible.

In a decentralized system, there is no need for a central server. It is Peer-to-Peer, to simplify the statement. Every peer in the network has a list of all the transactions. And they have the power to check and approve a purchase by ensuring it is secure, and that there’s no attempt of double spending.

For a transaction to be valid, there needs to be a consensus among the peers. If they do not have an agreement, the central server has to find a way to bring the accord in place, for that transaction to be confirmed.

That is for a centralized server system.

So, how is it possible to achieve a consensus where there is no central server? Satoshi Nakamoto made it possible through Cryptocurrency. Many didn’t think it could be possible. He designed the system in that transactions are confirmed not because there’s a consensus, but if they match.

How Does Cryptocurrency Work? How Are The Transactions Confirmed?

Here is the mechanism that governs the world of Cryptocurrency.

Any Cryptocurrency like the Ethereum or the Bitcoin is made up of a network of peers. All the past transaction records are distributed to every peer on the network. They can view every account detail on the blockchain.

To define a Cryptocurrency transaction, let’s say Sam transfers 100 Bitcoins to Nzilili. Sam will sign with his public private keys (public key cryptography) to complete the transaction. After he signs, the transaction details are passed from his account to every other peer on the network that is called Peer-to-Peer transaction. The peers approve the transaction, and a miner confirms it. Then Nzilili will have his Bitcoins in his wallet.

The details are passed throughout the network immediately after signing. In real-time. The confirmation, however, takes some given amount of time before it’s concluded. Cryptocurrency transactions are considered incomplete if they’re not confirmed. And it is only a miner who can confirm the blockchain transactions.

Now, after the confirmation, which can only be done by the miners, the transaction becomes a stone, or rather a block. It becomes a part of past immutable transactions. The transaction (block) joins the blockchain, and you cannot change it. No one can, not even the miners. Even Satoshi, the creator of Bitcoin cannot reverse a transaction once it has been confirmed.

To show the peers on the network that a transaction is confirmed, the miners stamp it as legit and spread it to all the nodes, (computers on the system). Every node adds this block to its database, and it now becomes a part of the blockchain.

The system rewards the miners for confirming the transaction, which we can say it’s the most important and critical part of the Cryptocurrency transaction, with a token of the given Cryptocurrency, for example, Ethereum or Bitcoin.

Can You Be a Miner?

The most valid answer to this question is yes! Everyone can be a miner. This is principally explained by the fact that the Cryptocurrency system delegates this task to no one specifically. It is a decentralized system, and so there’s no central authority to govern its functionality.

However, due to the absence of a central entity governing the system, Satoshi Nakamoto put in place a defensive mechanism to ensure that no single ruling body could misuse the system. Take for example a situation where a given entity forges thousands of transactions and spreads them to peers he created.

The Cryptocurrency system would crash immediately.

So to make sure that this never happened, Satoshi put in place some set of rules, or rather a state that miners had to invest some work on their computers.

The miners need to find a product of cryptographic function that connects the new block with its predecessor. The cryptographic product is called a Hash.

This process is called the Proof-of-Work.

You don’t have to understand much about the Proof-of-Work mechanism; it is right for you to note that it is the foundation of the cryptologic puzzle that miners strive to solve to win the token rewards.

Once a miner finds a solution to a puzzle, they can now convert it into a block, and it qualifies to become a part of a blockchain.

In Bitcoin, the cryptologic puzzle is called SHA 256 Hash algorithm. After solving this puzzle, the miner gets the rights to create a coinbase transaction, which in return gives them a given number of Bitcoins.

This is how the Cryptocurrency mining is done, and it is only after solving the SHA 256 puzzle that you can say that you’ve created a valid Bitcoin.

Now, the investment comes in in this way. For you to be able to solve this cryptographic puzzle, which is relatively complicated, you need a super powerful computer. There is also a specific amount of tokens you’ll manage to mine in a given time.

Satoshi didn’t leave a loophole for any peer to bypass this rule, and so only a few of them can manage to do the mining first hand. The super powerful computers are quite expensive, and not everyone can afford one. For this reason, many Cryptocurrency traders are just but brokers, buying and selling.

Why Would You Prefer Cryptocurrency To Fiat Currency?

If you paid close attention to Bitcoin, as one of the most popular Cryptocurrencies, is more of money than what you have in your ordinary bank account as a balance. Your bank account balance is just but entries you see in a database. And the database is controlled, mostly by people and rules you do not know. Don’t be shocked to find out that even the person you deal with in a bank knows nothing about the rules governing your money either.

Cryptocurrency is different, transactions are carried out on a decentralized system, with no single entity charged with the overall control, and there are no rules. Trades are executed by match, rather than the set of rules in conventional banks.

Let us look at some of the reasons why you should prefer Cryptocurrency over the fiat currency. We will look at the outstanding properties of Cryptocurrencies.

1. Fast and Borderless

Transactions are executed almost in real time. The miners take a maximum of two minutes to confirm a transaction. Since the blockchain is a connection of many nodes (computers) from all over the world, your geographical location has total zero effect on your transaction. You can buy from a buyer in the UK while in Kenya, without having to incur currency exchange rates.

2. Irreversible

Once the transaction is stamped legit, it becomes entirely immutable. No one can reverse a transaction once it has been confirmed. Not the miner who approved it, and not even Satoshi Nakamoto who invented Bitcoin, one of the most popular Cryptocurrency.

3. Secure

Cryptocurrencies are locked safely using a cryptography system using public cryptographic keys. If you do not own that wallet, you cannot transfer Bitcoins from it. Period. Cryptocurrency addresses use strong cryptography and vast numbers that make it impossible even for highly skilled hackers to break the scheme.

You can worry about aliens attacking the planet earth than someone compromising your Bitcoin address.

4. Pseudonymous

This is my favorite transactional property of Cryptocurrency. There is nothing that links me to my Cryptocurrency transactions. Not even the address. I can send Bitcoins to my next door neighbor, and he will not know if it was me who sent them.

5. Permissionless

There is no gatekeeper in Cryptocurrency. You do not need to ask for permission from anyone. It is just a software that anyone can download, install on their computer, and start transacting. Anyone can send and receive Bitcoins or any other Cryptocurrency.

The Common Cryptocurrencies

The Cryptocurrency has had such a massive impact on the global economy that even Satoshi Nakamoto wouldn’t dare dream of. We can say it is mostly due to its revolutionary properties that are overthrowing the fiat currency.

Although Bitcoin was the very first Cryptocurrency to see the world, there have emerged many other Cryptocurrencies. Some have become overly popular, while others are still struggling to stand their grounds.

Below are some of the common ones against their current value in US Dollars.

1. Bitcoin — $6,846.92

This was the first Cryptocurrency which was invented in 2009 by an anonymous guru — Satoshi Nakamoto. It is also the most traded globally. Satoshi is also the same person who created the Bitcoin blockchain.

2. Ethereum — $ 380.78

This comes number two after Bitcoin both in value and popularity. The Ethereum blockchain was created in 2015 by Vitalik Buterin and uses a currency token called Ether. Ethereum is popularly known for its flexibility that allows developers to create other chains out of it. We can call it a blockchain launch pad.

Ethereum can not only be used to process everyday transactions, but it can also be used to facilitate other complex contracts and programs. It is used mainly to develop crowdfunding programs.

3. Litecoin — $118.52

This was among the first Cryptocurrencies that came after Bitcoin. It is referred to as the silver if Bitcoin is the gold. It is similar to Bitcoin in design but developed a little faster to give way to more innovations.

Litecoin has developed to allow for faster payments, and accommodate more transactions.

4. Ripple — $0.4924

Ripple was invented in 2012, and it is used not only on Cryptocurrency transaction tracking, but it also serves in many other sectors including banking.

Unlike other Cryptocurrencies where a value is stored and exchanged, Ripple serves more as a token that protects the systems against spam.

We can say it is the most hated, and less popular among Cryptocurrencies. Many refer to it as “no real” Cryptocurrency.

To Sum Up, We Would Say that….

The Cryptocurrency market is growing wildly fast. There is a new crypto-invention nearly every day. Those who adopt new inventions early enough get rich, while late investors lose their money, not always though.

The market is dirty.

But that fact doesn’t mean that Cryptocurrency is going anywhere, no, it is here to stay.

Cryptocurrencies are revolutionizing the world. It’s already happening. People are converting their fiat currency to Bitcoins to avoid the devaluation in the event o currency fluctuation in the future. Many sectors are adopting blockchain to enhance service delivery.

Cryptocurrency is changing the world. Banks and other financial institutions are losing control. They don’t like it, but they have no other choice.

Every invention comes with a revolutionary promise, but only a few survive the test of time.

You now understand much about Cryptocurrency, and what it can do. You can either be a part of the change it is bringing to the world or stand aside and watch.