What is cryptocurrency and how does it work?

Cryptocurrencies, also known as cryptocurrencies or cryptocurrencies, 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 units.

Indeed, cryptocurrency is a digital payment system that does not depend on banks for transaction verification. This peer-to-peer payment system allows anyone, anywhere to send and receive money. These payments exist only as digital entries in an online database describing specific transactions, rather than physical money being transported and traded in the real world. Therefore, transactions involving cryptocurrency funds are recorded in a public ledger. Digital wallets are where cryptocurrencies are stored.

Note that the notion of “cryptocurrency” refers to the use of cryptography to verify transactions. In other words, advanced encryption is required to store and transmit cryptocurrency data between wallets and public ledgers. The purpose of encryption is to provide security and protection.

How cryptocurrency works

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

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

Indeed, even though bitcoin has been around since 2009, cryptocurrencies and blockchain technology applications are still emerging in financial terms and further uses are expected in the future. This technology could be used to trade in bonds, stocks and other financial assets.

Now let’s focus on blockchain technology. In effect, the latter is an open, distributed ledger that stores transactions in code. In concrete terms, 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 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 unified record of transactions. Each new transaction is recorded as it occurs, 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 remarkably fast transactions through sharding.

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

How to mine Bitcoin?

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

Conversely, proof-of-work cryptocurrencies require huge amounts of energy to mine. Bitcoin mining, for example, currently consumes 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 not practical for mere mortals, the proof-of-stake model requires less powerful computers because validators are randomly selected based on the amount of their stake. However, to participate, you must already own a cryptocurrency.

How to use cryptocurrency?

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

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

Using cryptocurrencies to make safe purchases depends on what you are looking to buy.

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

It should therefore be borne in mind that transactions are not instantaneous because they must be validated by some mechanism.

Conclusion

To conclude, cryptocurrencies are a type of decentralized digital currency based on blockchain technology. While 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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