In the end, what is the purpose of cryptocurrency? Our clear answer to understand everything

You may have heard of Bitcoin and Ethereum. You’ve probably also heard that people make thousands, if not millions, of dollars by “investing” in cryptocurrencies. But what is it? Or better yet, what is the point of cryptocurrencies?

The main purpose of cryptocurrencies is to solve the problems of traditional currencies by placing power and responsibility in the hands of the holders of the currency. All cryptocurrencies comply with the 5 properties and 3 functions of money.

They are also trying to solve one or more problems in the real world. Let’s see how cryptocurrencies work and why more and more people are beginning to appreciate this new development of money.

1. Cryptocurrencies belong to everyone

Cryptocurrencies work in the same way as any traditional national currency, with a few differences. der “Fiat money“Current is created and regulated by a government agency, which represented from now on a debt. Anyone who owns a country’s currency has an IOU issued by that country. That cryptocurrency does not represent a debt.

It strictly represents itself, and its value is determined by what someone is willing to trade for it. The fact that cryptocurrency is decentralized plays a crucial role in how its value is determined. No one owns or regulates a cryptocurrency. Its value is not subject to the political whims of a country or the monetary policy of a central bank.

Remark: some might consider the lack of centralization of cryptocurrencies as a way to avoid taxes. But like stocks and bonds, cryptocurrencies are considered an asset. In the United States, they are subject to capital gains tax on sale or exchange.

Currencies operating from a centralized general ledger (ie a single entity maintaining transaction registers, such as a national central bank) are exposed to human manipulation and corruption. By being decentralized, cryptocurrency operates on a “distributed ledger” or shared list of transactions. This type of ledger is the heart of cryptocurrency and brings us to the next reason why cryptocurrency matters.

2. Cryptocurrencies are virtually impossible to counterfeit

Cryptocurrencies run on a blockchain, which is the distributed ledger we talked about above. Understanding blockchain technology will not only help you understand what cryptocurrency is and why it is digital currency power key. The “block” is composed of chunks of encrypted data.

The “chain” is public database where blocks are stored and linked to each other sequentially. Each block in the blockchain has a specific code that sets it apart from all other existing blocks.

This unique code is called a hash. Blocks of information added to a blockchain are added chronologically. A new block is added directly after the last created block, which also has its own unique hash. The blockchain ledger or block database is distributed simultaneously throughout the worldspread over thousands, or in the case of Ethereum and Bitcoin, millions of computers.

There you have it, a simple explanation of cryptocurrency. Now assume that someone wants to manipulate a single block of data on the chain. In this case, he must manipulate all blocks from a given point in the story AND update all computers with copies of the blockchain ledger. It is theoretically possible, but the amount of power and money needed to do so successfully makes the attempt practically impossible.

3. Transactions with cryptocurrency are (largely) confidential

With traditional currencies issued by governments, you can make a private transaction or pay for something personal using physical species. Paper, metal, fabric and plastic currencies represent only a small fraction of the total volume of most fiat currencies in circulation. Large withdrawals of physical cash are promptly reported and reviewed by a central authority, such as governments and financial system regulators.

Remark: Monitoring large cash transactions is a good thing. It preserves the legitimacy of the currency and discourages criminal companies such as money laundering.

Cryptocurrencies are different. They rely on well-designed math to track the exchange between two people or companies. This exchange mostly done anonymously.

While the general ledger or the list of transactions is publicly available worldwide, parties trading in cryptocurrencies are more private. Pr. by definition, cryptocurrencies are stored electronically in digital wallets. The owner is the wallet’s private key holder.

That currency is exchanged digitally from mostly anonymous user-owned wallets.

Second remark: Although cryptocurrencies are presumed to be anonymous, advanced forensic analysis can reveal the identity of wallet holders. Some cryptocurrency projects, like Monero, are designed to resist identity discovery.

A few companies like Titan Bitcoin offer premium physical coins, embossed with cryptocurrency addresses and verifiable values ​​stored on the blockchain.

It is an exciting concept for enthusiasts, collectors and even gifts. He brings one small digital cryptocurrency in the real world. Publication: This is not a paid sponsorship. The author, Data Overhaulers, or its parent company has bitcoin currency at the time of publication.

4. Security of cryptocurrencies increases over time and in value

Earlier we explained that a hacking or manipulation required a huge amount of power and money, to the point of becoming a worthless effort. To proceed, an attacker must control more than 50% of the computers that make up the “consensus” network.

The consensus network is simply the collection of computers that receive copies of the blockchain or distributed ledger. For more established cryptocurrencies such as Bitcoin or Ethereum, cryptocurrency networks are so large thathacking is virtually impossible.

In the early days of cryptocurrencies, it was easier to gain the majority of control because the cryptocurrency network itself was much smaller. This is an important fact to keep in mind for investors or users of newer cryptocurrencies whose networks have not reached a relatively large size.

The smaller the network, the more vulnerable it is to hacking. An example of this happened almost with early Bitcoin: a group known as BitFury assembled a large number of computers for “mining”

What is Cryptocurrency Mining?

Mining is the process by which cryptocurrency transactions are verified and blocks are assigned to their hashes. It requires a lot of computing power. Users who lend their computers to the network of cryptocurrency validators receive rewards (via transaction fees) paid in the cryptocurrency they support. BitFury created a mine pool or verification network that became very profitable as the value of bitcoin increased.

But in 2014, they were close to reaching fifty percent of the network’s total strength. Although blockchain hacking and manipulation are not their goal, they have decided to limit the size of their influence on the Bitcoin network.

The owners of the pool have promised never to exceed forty percent of the total strength of the network. They did this to protect the value of bitcoin, as holders of the currency could fear a 51% attack from a single trader. If the value of bitcoin crashed, BitFury’s profits would have been affected, if not completely obliterated.

L ‘balance required between potential profit and network power is another form of blockchain security. Too much network power will lead to loss of profit and currency stability.

So what’s the point of Crypto?

Imagine a situation where you want to send money to an online friend to their account. There are many ways in which this transaction can go wrong. Especially:

  • The bank or bank may experience a technical error, such as machines not working well or systems failing
  • Your account may be hacked; for example, there may be identity theft or denial of service
  • Your friend’s account or your account may have exceeded the limit.

All of these scenarios are possible because there is one key flaw: the financial institution. And that’s why cryptocurrencies were created as the future of money! Now imagine the same scenario between two people using a bitcoin app or another cryptocurrency. A warning will appear asking if you are sure you want to send bitcoins. If you accept, the transaction will be processed immediately. The system authenticates the user’s identity and checks if you have the necessary balance to process the transaction. Then the payment is transferred to your friend’s wallet.

The transaction is much smoother as it is straightforward with no technical issues or procedural steps associated with banks. The goal of cryptocurrencies is to eliminate all the problems associated with traditional banking.

There are no limits to the money you can transfer using bitcoin, accounts are almost impossible to hack because you are not using a financial institution and there is no central point of failure. International cryptocurrency transactions are also faster than traditional bank transfers, which have existed since 1872, or any other method of transfer.

Unlike bank transfers which take hours or even days, cryptocurrency transfers only take minutes or even seconds.

Conclusion

Cryptocurrency is a way for us to make transfers electronically peer-to-peer without the risk of a single device gets too much power over the monetary system. The benefits of cryptocurrencies are still in theirs beginning.

That followers and enthusiasts will continue to praise the cryptocurrencies.

That experts will continue to measure this new financial tool against established currencies and real money. that the average consumer must decide which is a good time to test the place of cryptocurrencies in your life.

As blockchain technology continues to mature and useful blockchains appear in the mainstream, the necessity of cryptocurrency and its place in your financial toolbox will inevitably become obvious.

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