What are Cryptocurrencies and How do They Work?
As is the norm, our transactions are facilitated by trusted third parties, such as banks or governmental institutions, with all this information being recorded in ledgers closed to the public eye.
But, with the advent of Satoshi Nakamoto’s remarkable use of the blockchain technology, a novel electronic cash system, called the Bitcoin, was developed. This allowed for peer-to-peer transactions, consequently removing the ‘middle men’ from the equation.
This was possible because Nakamoto invented what others had previously failed to do so: Digital cash, or as it is popularly known now, a cryptocurrency.
Thus, single handedly, rewriting the very conceptual definitions of trade and economy.
Called by many names (crypto, digital currency, virtual currency, digital gold) cryptocurrencies, as is indicative of its name, is a combination of digital currency and cryptographic algorithms to form an encrypted virtual currency. Cryptocurrencies have no inherent value, and exist only in the network. It serves as a secure, fast and anonymous method of transaction over the blockchain.
This is actually where cryptocurrencies come into play.
The blockchain is simply a network of computers (nodes) that maintains a consensus of approved historical transactions in a digital ledger. This ledger is neither closed to the public nor is under control of a central authority. Rather, it is available in one open ledger that is also distributed across the entire network. Units of cryptocurrencies are created through ‘mining’; ‘Miners’ on the network compete to be the first to validate the information across the records by solving cryptologic puzzles, for which they receive a monetary reward.
Blockchain networks serve as a means to transacting and enabling the transference of value and information in the form of a token. A token, in a nutshell, is merely a tool or resource on the blockchain network that incentivizes validation of transaction or digitizes assets. Here’s an analogy to simplify things: If the blockchain is a car, then the token is the fuel that runs it.
Even though the monetary functions of tokens is just one potential aspect, cryptocurrencies are basically tokens used within blockchain networks to send value and make payments.
Everything you ever wanted to know about Bitcoin but were too afraid to ask. (via BBC Panorama and BBC Click)
Posted by BBC News on Monday, February 12, 2018