Very few people know, but cryptocurrencies emanated as a side product of some other invention. Satoshi Nakamoto, Bitcoin’s unknown inventor, the first and still most important cryptocurrency, never deliberated to invent a currency.
In the late 2008, in his announcement of Bitcoin, Satoshi said he developed “A Peer-to-Peer Electronic Cash System. After seeing all the centralized attempts fail, Satoshi tried to build without a central entity, a digital cash system. Like a Peer-to-Peer network for the file sharing.
This decision was became the reason to the birth of cryptocurrency. The missing section Satoshi found to perceive digital cash. This is the reason why it is a complex and bit technical, but once if you get it, you will be able to know more about cryptocurrencies than people do. So, let‘s try to make it as easy as possible:
To perceive the digital cash you need a payment network with accounts, transaction, and balances. That is easy to understand. Another major problem every payment network has to solve is to hinder the so-called double spending: to restrain that one entity spends the same amount twice. Generally, this is done by a central server who keeps record about the balances.
How cryptocurrency actually works?
In a decentralized or redistributed network, you do not have this type of server. So you need every single entity of the network to do such kind of job. Every of the peer in the network needs to have a list with all the transactions to check, if the future transactions are valid or an attempt to do double spend.
But how can these bodies or entities keep consensus about these records?
They need a perfect consensus. Normally, you take, again, a central command to declare the correct condition or state of balances. But how can you achieve consensus without a central command or authority?
Nobody did know until Satoshi appeared of nowhere. In fact, nobody believed it was even possible.
Satoshi proved it was. His major renovation was to achieve consensus without a governing or the central authority. Cryptocurrencies are a major part of this solution – the part that made the solution fascinating, thrilling and helped it to roll over the entire world.
What is cryptocurrency?
By taking away all the noise around cryptocurrencies and minimize it to a simple definition, you find it to be just limited entries in a database no one can change without fulfilling the specific conditions. This may seem typical, but, believe it or not: this is exactly how you can define a Crypto currency.
Take the money on your bank account: What is it more than entries in a database that can only be changed under particular conditions or orders? You can even take physical notes or coins: What are they else than limited or minimal entries in a public physical database that can only be changed if you match the condition than you physically own the notes and coins? The purpose of money is all about a verified entry in some kind of database of accounts, transactions and balances.
So, to give a proper definition – Cryptocurrency is an internet-based medium or channel of exchange which uses crypto graphical functions or tasks to conduct financial transactions. Cryptocurrencies leverage or support block chain technology to gain transparency, decentralization and immutability.
What is cryptocurrency mining?
Typically everybody can be a miner. Whereas a decentralized network has no power to represent this task, a cryptocurrency needs some kind of basic structure to prevent or intercept one ruling party from abusing or misusing of it. Imagine someone creates thousands of peers and spreads produced transactions. The system would break instantly.
That’s why, Satoshi set the rule that the miners need to finance or invest some work of their computers to qualify for this task or engagement. In fact, they have to find a hash – a product or outcome of a cryptographic task – that connects the new block with its precursors. This is called the Proof of work. It is based on the SHA 256 Hash Algorithm in case of bitcoin.
You do not need to understand the details about SHA 256. It is the only principal you know that it can be the basis of a cryptologic puzzle the miners compete to solve. After finding a key, a miner can build a block and add it to the block chain. As an inducement, he or she has the right to add a so-called coin base transaction that gives him a specific number of Bitcoins. To create valid Bitcoins this is the only way.
Understanding cryptocurrency properties
After verification, a transaction cannot be alter or reversed. By anybody. And anybody means anybody. Not you, not by your bank, not by the president of the United States of America, not by Satoshi, not even your miner. Nobody. If you send money, you send it. Period. Nobody can help you, if a hacker stole your funds from your computer or if even you sent them to a scammer. There is no safety net.
2) Pseudonymous or Onymous:
Neither accounts nor the transactions are connected to the real-world identities. You receive Bitcoins on so-called addresses, which are arbitrarily or randomly seeming chains of around 30 characters. While it is usually possible to analyze the transaction flow, it is not certainly possible to connect the real world recognition of users with those addresses.
3) Fast and global:
Transactions are generated nearly forthwith in the network and are confirmed in a couple of minutes. Whereas they happen in a global network of computers they are entirely indifferent of your physical location. It doesn‘t matter if I send Bitcoin to my neighbor or to someone on the other side of this world.