How cryptocurrency works

Cryptocurrency Basics :

A cryptocurrency is an encrypted decentralized digital currency that is sent between peer users and verified in a public registry through a process called mining.

Let’s take a simplified look at how cryptocurrencies such as bitcoin work. First, we will provide basic information about cryptocurrencies, and then we will review other properties due to which cryptocurrencies gained the popularity that they have today.

To understand how cryptocurrency works, you need to know the basic concepts associated with this technology. 

Here is some of them:

Public Registries:

 All confirmed transactions, starting from the moment the cryptocurrency is created, are stored in the public registry. The identity of the owners of the coins is encrypted. To ensure the legitimacy of recording, the system uses other cryptographic methods. Such a register enables digital wallets to accurately calculate the amount available for spending. Also, when making new transactions, it is checked that in each such operation only those coins that are currently at the disposal of the wallet owner are used. In the Bitcoin system, such a public registry is called a “transaction block chain”.

Transactions: 

Transferring funds between two digital wallets is called a transaction. The transaction is submitted to the public registry and is awaiting confirmation. When making transactions, wallets use an encrypted electronic signature (an encrypted data set called a “cryptographic signature”), it provides mathematical confirmation that this transaction comes from the owner of the wallet. The confirmation process takes some time (currently it takes 10 minutes for bitcoin), while the “miners” are mining (“mining”), that is, they confirm the transactions and add them to the public registry.

Mining: 

In simple terms, mining is the process of confirming transactions and adding them to the public registry. To add a transaction to the registry, the miner must solve a computational problem (a kind of mathematical puzzle). The complexity of these tasks is constantly increasing. Mining is based on open source, so anyone can confirm transactions. The miner, who solved the problem first, adds a “block” of transactions to the registry. This interconnection of transactions, blocks and the public register of block chains provides high reliability, due to the inability for anyone to add or change a block as they wish.

Cryptocurrency Anatomy:

Anatomy of cryptocurrencies Although there may be exceptions, there are several characteristics (in addition to the main ones discussed above) that distinguish cryptocurrencies from financial systems of the past.

Decentralized: 

Most currencies in circulation are controlled by a certain centralized “government”, so their creation can be regulated by third parties. The creation of cryptocurrencies and related operations are open source, controlled by code and rely on peer-to-peer networks. There is no single authority capable of influencing cryptocurrency.

Digital nature: The traditional currency is determined by some physical object (for example, the US dollar is a representation of gold reserves), and the cryptocurrency is completely digital. Digital currencies are stored in digital wallets and transferred to other people’s digital wallets digitally. No physical object exists.

Open Source: 

Typically, cryptocurrencies are built based on open source. This means that developers can create application interfaces without paying a fee, and everyone can join the network and use it.

Cost: For something to become a currency, it must have value. The US dollar used to be tied to physical gold. Gold was not enough, and for its extraction and refining, certain work was required. Thus, scarcity and work added value to gold. This in turn added value to the dollar.

A similar concept is used in cryptocurrencies. Here, coins (which are nothing more than publicly agreed ownership records) are generated, or mined, by so-called “miners.” Miners are people who run certain programs on special equipment created specifically for solving problems with proof of work.

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