Cryptocurrencies & Blockchain explained in two minutes
In it’s simplest form, Cryptocurrency is digital money, based on advanced mathematical algorithms that uses cryptography to secure transactions and control the creation of new coins.
The first cryptocurrency ever created was Bitcoin, back in 2008 by Satoshi Nakamoto, which he described as a ‘Peer-to-Peer Electronic Cash System’. Bitcoin is a cash system, which has no central authority. It relies on a distributed public ledger for recording all transactions that have ever happened. Cryptocurrencies are entries logged in decentralized consensus-databases.
A cryptocurrency like Bitcoin consists of a network of peers or computers (similar to the P2P file-sharing system), where every peer has a record of the complete history of all transactions that have occurred for this crypto-currency, and thus, by calculation, of the balance of every account.
It’s like all of us know who has how many Bitcoins. Also, every time someone gives some coins to someone else, all of us get to know it, and we can therefore know their new balances.
But what if someone spends money that they don’t have? This is where the concept of verification and consensus comes in.
The confirmation of any transaction in this distributed ledger system happens through a mechanism called ‘mining’, which is performed by ‘miners’. Miners’ sole purpose is to verify transactions and put a lock on them by solving complex crypto algorithms. Once solved, they are easy to verify and therefore, be accepted as valid by all other miners in the network.
When a transaction is verified by a miner, it is broadcasted to all peers in the network, and it’ll be added to the ‘blockchain’. For their efforts of mining and verifying transactions, miners get rewarded with the corresponding cryptocurrency tokens.
Any transaction that gets confirmed in this peer-to-peer public ledger, is instantly known to every peer in it’s ecosystem, and is set in stone. It’s visible for everyone to see, is no longer forgeable, no longer reversible, and is part of an immutable record of historical transactions: of the so-called blockchain.
Blockchain solves the problem of how to establish trust between otherwise unrelated parties over an untrusted network like the Internet. Blockchain helps create an open, trustless, independent and permissionless protocol. Whenever there is a so called “middle man” enforcing transactions as a trusted intermediate, blockchain technology can be adopted to rid the system of this middle-man wherever present.
If you think about it, everything we do today has an intermediary — be it in production, law, finance, communication, or even governments. Almost every function in these realms can be decentralized using the blockchain and remove the intermediary. Blockchain’s applications are practically limitless and subject to the imagination of blockchain entrepreneurs.
