How Does Cryptocurrency Work

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A story is told of a young boy, barely 12 years old at the time, his name, Erick Finman. He bought bitcoin back in 2011 when it was retailing at $12. He had just received a $1000 gift from his grandmother and wasn’t sure what to do with the money. On the advice of his brother, the young boy invested in bitcoin continually to the point of owning 403 coins by 2017. He became a millionaire by 18 and won a bet against his parents.

Erick has hence become a teenage millionaire sensation and his story has impressed many. It has left many wondering; what is cryptocurrency and just how does it work? This piece tries and answer the question by breaking down the fundamentals and what you need to know about cryptocurrencies.

Let’s Start With The Basics

Since the beginning of time, people have traded physical assets for good. An item for another item. Then came currencies. Currency faster became the solution and instantaneously replaced barter trade. Governments and with help of the central bank became the authorities in charge of printing tracking currencies. Things changed in 2009.

Satoshi Nakamoto, the founder of bitcoin introduced the concept that would change what we thought about money from that point henceforth. He asked the question, what if we didn’t need governments to regulate our money. Cryptocurrency was born.

Cryptocurrencies are the digital form of money running on a new monetary system and are not regulated by any central authority or tracked. There are many types of cryptocurrencies and they have various functions as well. However, one thing that is common with all of them is a decentralized peer to peer system called the Blockchain. The technology works to ensure the cryptocurrencies are kept in track whether trading or being stored in a digital wallet.

The infrastructure employed in the technology includes a 2-factor verification that ensures cheating is not possible. Bitcoin pioneered the system and set up in such a way that the receiver and the sender would have to sign off payments. Besides being highly secure, the system is anonymous and transparent. And the ledger is in the middle of the whole infrastructure.

How The Ledger Works?

Cryptocurrencies have a ledger where transactions are made public for transparency. The ledger ensures players play fair and that the risk of double spending is eliminated in the process.

Basically, the ledger is a list of entries in the database which cannot be changed unless specific conditions are met. Nobody owns the ledger or the Blockchain. It’s decentralized, self-running or self-governed and there is no interference by outside parties.

Verifying Transactions And Blockchain

A transaction needs to go through a verification process before it becomes recorded on the Blockchain. Miners do the work of recording the transactions and adding them to the public ledger. They solve arithmetic problems by the use of powerful computers. The process of confirmation is open source, meaning anyone can confirm the transaction.

The first miner to add the block to the transaction ledger receives the award in a process known as the proof of work.

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