Understanding Cryptocurrencies and how they work as a medium of exchange

Cryptocurrencies are digital currencies that are exchanged and recorded on blockchains. It does not require central intermediaries (i.e. banks) for transactions.

Blockchain is a decentralized technology spread across many computers that record transactions.

Cryptocurrencies: An Overview

Cryptocurrencies have gone global in attempts to replace the current financial system. People look at cryptocurrencies from various perspectives. Some look at transactions, some for rewards and some for investment.

In 2008 “ Satoshi Nakamoto” described whitepaper for an implementation of a digital currency called Bitcoin.

Whitepaper is a document that describes the information about crypto concept and a roadmap for how it will grow and succeed.

Cryptocurrencies support a peer-to-peer mechanism and eliminate the third party for transactions. For example- no bank account or credit card is required for crypto transactions. It just needs a crypto wallet. 

Crypto Transactions

Transaction in Crypto proceeds over the blockchain, which is decentralized form of transaction it does not include third party.

The network of nodes maintains the system. Nodes are an integral part of the blockchain that validates transactions. It uses cryptography which secures information. Cryptography uses public key to encrypt and private key to decrypt data.

Types of Cryptocurrencies

 Blockchain technology is open source which means any software developer can use the original source code and create something new. There are approx 10,000 cryptocurrencies in circulation however the figure keeps changing.

Main types of cryptocurrencies

The most widely used cryptocurrencies are Bitcoin and Ethereum.

Bitcoin was the first cryptocurrency that was launched in 2008 by “Satoshi Nakamoto”.

Bitcoin is a decentralized digital currency that uses blockchain technology for transactions. Bitcoin’s total supply is 21,000,000 coins. This was the first ever cryptocurrency comes into actual use. It works on proof-of-work mechanism (PoW).

Ethereum is a decentralized blockchain network. It works on proof-of-stake (PoS) mechanism. It was founded by Vitalik Buterin in 2013. It ranks second after Bitcoin. Ethereum enables the working of smart contracts.

 Advantages 

  • Decentralization- It is a decentralized form of transaction it does not require any central authority for making transactions.
  • Speed of transactions- Speed of transactions is very fast it does not take much time to process the transactions.
  • Control- cryptocurrencies give people to control their money.
  • Electronic- As it is not associated with your bank, it is transferred electronically and securely with the blockchain.
  • Secure- blockchain technology makes the transactions in crypto more secure and private.

Disadvantages

  • Illegal transactions- The privacy and security of crypto transactions are very high so it is hard to trace any user. It led to many illegal transactions.
  • High energy consumption- mining cryptocurrencies require more computational power which led to high energy consumption.
  • Lack of proper regulation- Due to the lack of proper regulation there are risks and uncertainties in crypto world.
  • Lack of understanding- If you’re not digitally aware the concept of crypto might be tricky for you so it will take a lot of time and effort to understand and trying to invest in something needs a proper understanding otherwise it will be risky. You need to know the pros and cons of investing in crypto.
  • Non-refundable- If someone sends funds to the wrong wallet address it cannot be retrieved.

  How are cryptocurrencies created?

The process of creating cryptocurrencies is called mining. Transactions are validated and mining performs the validation process and creates new cryptocurrency.

Not all cryptocurrencies come from mining instead developers create new currency through hard fork.

Related:Bitcoin’s Hard Forks building a literal interpretation of Bitcoin

Conclusion 

The emergence of cryptocurrency is part of a broader wave of technology that facilitates peer-to-peer transactions.

Cryptocurrencies are the first and most developed application of blockchain technology. It facilitates transactions without financial institutions. The success of cryptocurrencies puts pressure on the existing financial institutions. However, the limitations have become apparent. Decentralized platform without a trusted intermediary can be costly and the volatility of cryptocurrencies is a big obstacle. So it is necessary to know about the risks and uncertainty involved in it before making an investment.

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