How cryptocurrency works for dummies
How cryptocurrency works for dummies. Cryptocurrency has now become a market that operates in the shadow market. Some forex brokers have also provided services to expand by offering crypto accounts.
Plus there is a crypto account competition sponsored by a broker that gives lucrative prizes. Cryptocurrency has become a new trading asset besides forex trading. But how does cryptocurrency work, how is a cryptocurrency created, what is cryptocurrency mining?
These questions still often arise for dummies, and I will provide answers to these questions.
Cryptocurrency is an encrypted and decentralized digital currency. To transfer between friends and confirmed in a general ledger through a process known as mining.
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Cryptocurrency is a digital currency, which only contains numbers and has no actual physical form. However, users can transfer the cryptocurrency to other users throughout the world.
The way cryptocurrency works is different from you transferring flat or traditional non-crypto currency money like US dollars digitally. At some merchants who have accepted Bitcoin as an accepted payment tool, you can use cryptocurrency to buy services at the merchant.
If you use flat money, to transfer funds to another country, you need to contact the bank as an intermediary. This sometimes requires high transfer fees. With cryptocurrency, you might don’t need of banks and other intermediaries.
The cryptocurrency money transfer model relies on blockchain technology, which is decentralized (meaning there is no single entity responsible for it).
Instead, each computer in the network confirms a transaction called a miner.
To understand how cryptocurrency works, we need to learn some basic concepts, about the public ledger, transaction, and mining.
What are Public Ledgers?
All transactions confirmed from the start of the creation of cryptocurrency are stored in a general ledger. The identity of the owner of the coin is encrypted and the system uses other cryptographic techniques.
To ensure the validity of the record. Ledger ensures that the corresponding digital wallet can calculate the balance that can be spent accurately.
Also, new transactions can be checked to ensure that each transaction uses only the coins that the user currently has. Bitcoin calls this general ledger a “transaction blockchain”.
How to Transactions cryptocurrency
Transfers of funds between two digital wallets are called transactions. The transaction is submitted to the general ledger and waits for confirmation.
The wallet uses an encrypted electronic signature when the transaction is made. A signature is a part of encrypted data called a cryptographic signature and provides mathematical proof that the transaction is from the owner of the wallet.
The confirmation process requires a little time (ten minutes for Bitcoin). Mining confirms the transaction and adds it to the general ledger.
What is a cryptocurrency mining?
Mining is the process of confirming a transaction and adding it to a general ledger. To add transactions to the ledger, “miners” must solve computational problems that are increasingly complicated (such as mathematical puzzles).
Mining is open-source so anyone can confirm the transaction. The first “miner” in solving puzzles can add “blocks” of transactions to the ledger. The way in which transactions, blocks, and general blockchain ledgers work together ensures that no one can easily add or change blocks arbitrarily.
After the block is added to the ledger, all related transactions are permanent, and they add a small transaction fee to the miner’s wallet (along with newly created coins). The mining process is about everything that gives value to a coin and is known as a proof-of-work system.
Anatomy of Cryptocurrency
Although there are exceptions to the rules, there are several factors (beyond the basics above) that make cryptocurrency very different from the financial system in the past, here for the anatomy of cryptocurrency.
The adaptive scale means that cryptocurrency is built with measurements to ensure that the cryptocurrency is built properly on a large and small scale. An example of an adaptive scale:
Bitcoin is programmed to allow one block of transactions to be mined approximately every ten minutes. The algorithm is adjusted after each block in 2016 (theoretically, every two weeks) to be easier or more difficult based on how long it will take for the 2016 block to be mined.
So, if it only takes 13 days for the mining network to block 2016, that means it’s too easy to mine, so the level of difficulty increases. However, if it takes 15 days for the mining network to block 2016, it shows that it is too difficult to mine, so the difficulty decreases.
Other measurements included in digital coins to enable adaptive scales include limiting supply over time (to create scarcity) and reducing gifts for mining because more coins are mined.
Cryptocurrency uses a cryptographic system (encryption) to control coin making and to verify transactions. Cryptography is the knowledge that studies mathematical techniques related to aspects of information security, such as data confidentiality, data validity, data integrity, and data authentication.
Most of the circulating currencies are controlled by a centralized government so that they are regulated by a third party. Cryptocurrency creation and transactions are open sources, controlled by code, and depend on “peer-to-peer” networks. There is no single entity that can affect currencies.
The form of a traditional currency is determined by physical objects (US $ exists as paper money and in the years originally supported by gold, for example), but all digital cryptocurrency.
Digital coins are stored in digital wallets and transferred digitally to someone else’s digital wallet. There are no physical objects.
Cryptocurrency is open-source. That means that developers can create an API without paying fees and anyone can use or join the network.
Most cryptocurrency uses a proof-of-work system. The proof-of-work scheme uses computational puzzles that are difficult to calculate but easily verified to limit cryptocurrency mining exploitation.
Basically, this scheme is similar to the difficulty in solving “captcha” which requires a lot of computing power. NOTE: Non-proof-of-work (such as proof-of-stake) systems are also used.
The cryptocurrency owner keeps their digital coins in an encrypted digital wallet. The identity of the coin holder is stored in the encrypted address they control – not attached to a person’s identity.
The relationship between you and your coins are pseudonymous, anonymous as a ledger that is open to the public (and thus a large book could be used to gather information about a group of individuals in the network).
In order for something to be an effective currency, it must have value. US dollars are used to represent real gold. Gold is rare and requires work to mine and purify, so scarcity and work provide value, in turn, provides the value of the US dollar.
Cryptocurrency works together on value. In cryptocurrency, “coins” (which are nothing more than those approved by the public on ownership records) are produced or produced by “miners”.
These miners are people who run programs on hardware made specifically to solve proof-of-work puzzles. The work behind the mining coins gave them value, while the scarcity of coins and their demand caused their value to fluctuate.
The idea of ?? work that gives value to a currency is called a “proof-of-work” system. Another method for validating coins is called proof-of-stake.
Values ?? are also created when the transaction is added to the general ledger because it makes the “transaction block” that is verified requires work as well. Furthermore, the value comes from several factors such as utility and supply and demand.
What is a cryptocurrency backed by?
Cryptocurrency does not have backups of other commodities or physical gold as collateral.
Through its history cryptocurrency runs as speculative assets.
The value of cryptocurrency will only depend on public users, the higher the demand for cryptocurrency on the market. Even though there are no other commodity backups or precious metals. But the value of cryptocurrency becomes a valuable asset that is liquid because it can be exchanged through exchangers for flat money in general.
Blockchain for dummies
Blockchain is a recording system or database that is widespread in computer networks throughout the world, often referred to as distributed ledgers. Every transaction recorded in a ledger can also be seen by all internet users.
So simply Blockhain’s definition as a ledger can be accessed by anyone, including people who do not make transactions. Blockchain also has several characteristics in making transactions and recording, which are as follows:
Have a more logical calculation
Basically Blockchain is the blocks inside it in the form of code that can be translated and verified by the developer.
The algorithm in it makes the value more measurable, different from fiat currencies like in daily life. For example USD, the value is usually controlled by the Central Bank in the United States.
They are free to print how much is within a certain period, including the implications of interest rates. Unlike cryptocurrency, which can be calculated mathematically and structured, even the amount of currency spread can be predicted.
This allows many people to predict how much digital money there will be in the world. Even the value of inflation can be calculated properly.
Having qualified security
The decentralized Blockchain model causes no data to be centralized in one place. All spread to the miners’ servers, which helped secure the Blockchain network. To become miners they must accurately solve existing calculation algorithms so that new blocks are created.
This scattered information makes it difficult for hackers to hack into the blockchain because it requires at least 50% of computer data worldwide.
If at this point you still feel a little confused, don’t worry! This is because understanding cryptocurrency concepts is indeed a challenge. Even tricks about cryptocurrency won’t be a problem if you don’t understand them at first, because every new video, explanation, or article that you learn will make your understanding of cryptocurrency more clear and until you finally understand.
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