There is a coin that’s currently worth thousands of US dollars but it’s not made of gold, platinum or any other metal. In fact, it’s not kind of coin you can hold it in your hand or stick in a piggy bank. It’s a digital currency which means it only exists electronically. We are talking about the cryptocurrency Bitcoin. It does not work like most fiat money. It isn’t attached to a state or government so it does not have a central issuing authority or regulatory body.
So how cryptocurrency does works?
Cryptocurrency would not exist without a distributed network of computers and a little yet important thing called cryptography. Let’s take an example of world’s first cryptocurrency to understand the working principle of cryptocurrency.
Bitcoin is a fully digital currency and you can exchange it between computers in the worldwide peer-to-peer network. Unlike media files, bitcoin isn’t a string of data that can be duplicated but it’s actually an entry on a huge global ledger called the blockchain. A Bitcoin is basically a digital record in a public ledger that keeps track of ownership in the Bitcoin system. The ledger records ownership without revealing any real identities by using digital addresses, which are like pseudonyms. Ownership depends on possession of a secret digital key that gives the owner the exclusive ability to transfer bitcoins to other addresses. The owner can spend bitcoins to purchase goods and services from any business that chooses to accept them. The blockchain records every Bitcoin transaction that has ever happened and as of early 2018, the complete ledger is over 150GBs of recorded transactions.
Transferring bitcoin is similar to sending the bunch of media files and hence when you are sending Bitcoin you are basically writing the exchange down on the blockchain or ledger. Even though the blockchain is a central record there’s no official group of people who update the ledger and keep track of everybody’s money like typical banking systems currently do. It is decentralized and distributed among the nodes (computers) on the blockchain. In fact, anybody can help to keep the blockchain up to date with a copy of the new transactions by running a Bitcoin Wallet on their PC, many people do it all works because so many people are keeping track of the same information to make sure all transactions are recorded, if data is entered into the ledger 51% of the nodes have to agree and show the same transaction.
When it comes to security Bitcoin is kept safe thanks to cryptography which is why it is considered a cryptocurrency. Specifically, bitcoin stays secure because of encryption keys which are a complex algorithym that secure the information that can be used to make mathematical guarantees about transactions. These keys are the essential elements to execute the transaction on blockchain network. With these keys, they can sign transactions to unlock the value and spend it by transferring it to a new owner. Keys are often stored in a digital wallet on each user’s computer or smartphone. Possession of the key that can sign a transaction is the only prerequisite to spending bitcoin, putting the control entirely in the hands of each user.
Bitcoin is created through a process called “mining,” which involves competing to find solutions to a mathematical problem while processing bitcoin transactions. Any participant in the bitcoin network (i.e., anyone using a device running the full bitcoin protocol stack) may operate as a miner, using their computer’s processing power to verify and record transactions. Every 10 minutes, on average, someone is able to validate the transactions of the past 10 minutes and is rewarded with brand new bitcoin.
Computers that were specially designed to solve these hash problems take, on average, about 10 minutes to solve each mathematical problem, In case of Bitcoin. Computers with high-end computational power are setup to solve these algorithms first and validate the transaction by adding a new block on the blockchain and in return for solving the hash receives a certain amount of reward in form of Bitcoin.
Today, Bitcoin has given the birth number of other cryptocurrencies such as Litecoin, Namecoin, Bitcoin Cash etc. Currently, more than 1600 cryptocurrencies are in circulation and the number seems to be increasing with new crypto coins are being announced almost every day.