How Does Cryptocurrency Works and Why Do We Use It?

To put it in the simplest way possible, cryptocurrency is a type of digital money. It is designed to offer robust security while also being anonymous. It’s called cryptocurrency because it is based on cryptographic elements i.e. to track transactions, one has to crack complex codes and release information.

The most well-known cryptocurrency is Bitcoin.

How Does it Work?

Cryptocurrency involves transactions that are sent from peer to peer from a digital wallet that stores the cryptocurrency. This is done by matching public codes that connect back to the privately held passwords (by users) known as cryptographic keys.

A public ledger is used to record the transactions. This public ledger is what we refer to as the blockchain.

Users of a cryptocurrency can secure access to this ledger by downloading a wallet, known as a “full node”. However, this isn’t possible for those who use third-party wallets such as Coinbase. The transaction values are divulged to the public. However, this is not the case when it comes to the actual users who carry out the transaction.

Each transaction on the ledger is linked to a wallet and the user of the wallet will have a key or password to control it. The amount shown in the ledger is the amount of said cryptocurrency present in the wallet.

When cryptocurrency is transferred between wallets, it is done with the help of public and private passwords. The transaction is then added to the ledger. It is possible for multiple transactions to be added this at the same time.

Since these transactions are added sequentially as blocks, the ledger is called a “blockchain”. When the transaction is entered into the blockchain, the entire peer-to-peer network (only those with a “full node”) is made aware.

Once this occurs, a particular set of users called miners solve cryptographic puzzles using special software to add the block of transactions to the blockchain/ledger. In return, as an incentive, they receive a few cryptocurrency coins such as Bitcoins.

In some cases, multiple miners will combine their computing power to solve puzzles and share the coins. Since the algorithms are consensus-based, the transactions can be verified as correct purely on the basis that most of the miners solving the puzzles have submitted the same transaction data.

Miners are the ones who are responsible for confirming transactions and adding them to the blockchain. They confirm transactions by solving cryptographic puzzles and as an incentive, receive cryptocurrency coins as payment.

Why Use Cryptocurrency?

There are a few key reasons why you should consider using cryptocurrency. Here are a few of them.

  1. It’s decentralized. The database is managed by a network of users running computers with blockchain technology. There is no central authority. It runs on a user to user basis. So, misuse is practically impossible.
  2. It’s secure. When using, let’s say, a credit card, you hand over critical information to your merchant. The money is “pulled” from your account and the payment is made. In a cryptocurrency network, the user only sends the recipient an exact amount. There is no private information. The transaction is validated by the network.
  3. No middlemen. Money is sent directly from you to the recipient. So, there are no handling or service charges.

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