What is cryptocurrency and how does it work?

Cryptocurrencies, also known as cryptocurrencies or crypto, refer to any type of digital or virtual currency that uses cryptography to secure transactions. In the absence of a central issuing or regulatory authority, cryptocurrencies rely on a decentralized system to record transactions and issue new entities.

In fact, cryptocurrency is a digital payment system that does not rely on banks to verify transactions. This peer-to-peer payment system allows anyone, anywhere, to send and receive money. These payments exist only as digital records in an online database that describes specific transactions, rather than as physical money that is transported and exchanged in the real world. Transactions involving cryptocurrency funds are thus recorded in a public ledger. Digital wallets are the place where cryptocurrencies are stored.

Note that the term “cryptocurrency” refers to the use of encryption to verify transactions. In other words, advanced coding is required to store and transfer cryptocurrency data between wallets and public finances. The purpose of encryption is to provide security and safety.

How cryptocurrency works

It is possible to use cryptocurrencies to buy everyday goods and services, but most people invest in cryptocurrencies in the same way as in stocks or precious metals. Although cryptocurrencies are a new and exciting asset class, it can be risky to invest in them as you need to do extensive research to fully understand how each system works.

Transactions verified and recorded on a blockchain serve as cryptographic evidence or a unit of measurement from one person to another without the assistance of a trusted third party.

In fact, although bitcoin has been around since 2009, cryptocurrencies and uses of blockchain technology are still emerging in economic terms, and more uses are expected in the future. This technology can be used to trade bonds, stocks and other financial assets.

Now let’s focus on blockchain technology. The latter is actually an open and distributed ledger that stores transactions in code. Specifically, it’s like a checkbook spread across thousands of computers around the world. Each transaction is recorded in a “block”, which is then linked to a “chain” of previous cryptocurrency transactions.

It has been compared to a book where you write down everything you spend money on, each page is like a block, and the whole book is a collection of pages, in other words a “blockchain”.

So anyone using cryptocurrency has their own copy of this ledger with a blockchain to create a comprehensive record of transactions. Each new transaction is recorded as it happens, and each copy of the blockchain is updated simultaneously with new information, ensuring that all records are identical and accurate. Elrond for example (EGLD course) is a blockchain protocol that offers extraordinarily fast transactions through sharding.

To prevent fraud, each transaction is validated using a technique such as proof-of-work or proof-of-stake.

How about my Bitcoins?

Bitcoin mining is the process by which new units of cryptocurrency are released to the world, usually in exchange for validating transactions. While the average person theoretically knows my cryptocurrencies, this is getting increasingly difficult in proof-of-work systems like Bitcoin.

In contrast, proof-of-work cryptocurrencies require enormous amounts of energy to extract. Bitcoin mining, for example, currently uses 127 terawatt hours (TWh) of electricity per year, which exceeds Norway’s total annual electricity consumption.

While mining in a proof-of-work system is impractical for ordinary mortals, the proof-of-stake model requires less powerful computers because validators are randomly selected based on the amount of their efforts. To participate, however, you must already own a cryptocurrency.

How to use cryptocurrency?

While you can buy a variety of goods and services with crypto, especially Litecoin, Bitcoin or Ethereum, you can also use crypto as an alternative investment option for stocks and bonds.

Bitcoin, the best known crypto, is a secure, decentralized currency that has become a store of value like gold. You can buy Bitcoin on the platform KuCoin.

Using cryptocurrencies to make secure purchases depends on what you are trying to buy.

That said, if you want to make a payment in cryptocurrency, you most likely need a cryptocurrency wallet. A “hot wallet” is a type of wallet that interacts with blockchain and allows users to send and receive their stored cryptocurrencies.

It should therefore be borne in mind that transactions are not immediate because they need to be validated by some mechanism.

Conclusion

To conclude, cryptocurrencies are a type of decentralized digital currency based on blockchain technology. Although you may be familiar with the most popular cryptocurrencies, namely Bitcoin and Ethereum, there are over 19,000 different cryptocurrencies in circulation.

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