Some say it’s the way of the future. Some say its just a scam. Few call it magic internet money. But what the hell is it? What the heck is a cryptocurrency? and why is it taking the world by storm?
Well, as its most basic definition cryptocurrencies are just mediums of exchange. They’re means of carrying out transactions digitally. They are virtual currencies completely independent of government control or any independent authority, Entity or server.
They are completely at their own thing, Which means that you have no necessity to walk into a bank to complete a transaction.
How does Crypto Transactions gets verified when there is no central authority?
So you might think that Where there is no central authority to verify the transaction. What is this crypto famous for? and why is it most valuable? Where does it supplies even come from?
Well, We now get into cryptocurrencies at their basic technological level. So let’s get into an example with Bitcoin now. According to my case, there are not many people who haven’t hear about bitcoin after its recent public craze. Which made everyone to talk about the bitcoin. We start with this thing called “The Blockchain“.
What is Blockchain in simple words?
The blockchain is a public ledger of all transactions that have ever occurred on the bitcoin peer to peer network. It’s just one long record book dating all the way back to the first bitcoin transaction dated in January 2009.
As so long as these transactions continued to be made with bitcoins, The Ledger will continue to grow and build on its own. Hence the reason why we call it a chain. And this ledger is made public to everyone and will continue to have this information distributed and digitally synchronized all across the world.
It will always share the same information on it. So, Me sending one bitcoin to my friend is publicly recorded on chain ledger. And once that transaction takes place, everyone who does have the copy of this ledger will be notified of an incoming transaction taking place on the bitcoin network.
And will then work to verify the transactions taking place are valid and real. These people who take track of the ledgers are also known as MINERS. But why? For this, we need to take a deeper into look the process of verifying transactions looks like.
- Bitcoin Mining Explained | How To Be a Bitcoin Miner
- Stop Pirated Sites From Using Your CPU To Mine Cryptocurrency
In order to have a transaction to even occur in the first place, it needs to have a digital wallet on the bitcoin network. This wallet will include two things, A private key, and a public key.
The vary existing of these two keys is very important to the whole cryptographic nature of cryptocurrency. In order for your transactions to be securely encrypted and be authentic, they need to have these two keys involved.
So say you want to send a transaction to someone that says “I send 20 bitcoins to Jimmy”. Well to notice that this message is true it needs to be digitally signed by my private key. Which basically functions as your own personal identifier or your digital signature.
Which means that your own private key is able to create a new message. Now once you signed your message and ready to send it off to Jimmy, It could be sent to the bitcoin network with your public key.
The public key acts as a Verifying Mechanism which essentially confirms that your specific message was indeed marked by your digital signature or your private key and that it is Associated with your specific private key which sent off along with your transaction.
Now here we will get into the whole mining aspect of this process.
What Is the Purpose Of Crypto Mining?
Once your transaction is sent off into the bitcoin network. and its up to quickly announce to the persons who are maintaining the blockchain ledger. These miners are now tasked with the fun job of having to use computational algorithms in order to verify the delivery of each individual transaction.
This process makes sure that no fraudulent transactions are taking place. And is done through a “Cryptographic Hash Function“. More specifically the SHA256 hash function.
And this process of verifying the transaction is not too cheap. People will spend 100’s and 1000’s of dollars creating these mining rigs and jacking up their electric bills to a normal just to verify a transaction faster and add it to the blockchain network.
Why buy graphics cards and blow the number of electricity bills for this?
Well, For your work onto adding into the blockchain and verifying the transactions that have occurred on the bitcoin network you get rewarded in receiving some brand new bitcoins straight into your digital wallet.
As if today, For successfully adding a transaction to the blockchain you’ll be rewarded with 12.5 bitcoins. Do you know how much worth a bitcoin while writing this post?
Hell Ya! This is why the entire blockchain confirmation process is called mining. The energy for using your computational work rewards in crypto. So this is where we get our gold mining analogy from.
This is why people are spending thousands of dollars on this kinda machinery. Because it is not just a manner of solving hash functions. You need to be “THE FIRST” of that hash function and create the new block. Because that’s how you get paid.
And that’s why there is a race to build out the largest and fastest mining rig out there. So that you can get rid of those damn algorithms and get the sweet digital gold.
But the reward which you get isn’t constant all the time. See “The Bitcoin Reward Rate” is build to have the rate in every four years. This is the key but between the inflation rates throughout time and to limit the total number of bitcoin rate that can ever be created.
So this also means that the total number of bitcoins that can ever be in circulation is 20,000,000. Now one of the main arguments made about this is that it will lover the revenue that miners receive when time goes by.
However, If the supply of new bitcoins created decreases every four years or so. Then feel radical that demand for bitcoin will also increase. Which should keep the reward for receiving bitcoins at a good cost benefit ratio.
But that’s bitcoin for you.
But why is it even valuable?
Where does it get its intrinsic value from?
Well, The basic answers for that are the basic rules of supply and demand.
As the market gives its value. and others will also say that it is the promising technology in cryptographic currencies offer. and that’s true as well.
Though there are objectively much better cryptocurrencies out there than bitcoin, Like litecoin which can process transactions much faster than bitcoin. or monero which is even faster than that. or ripple which is even faster.
Right now there are just lot’s of hopes around the cryptocurrencies which is kinda influencing these coins. So before you buy any coin, Just make sure to reseach the following.
- Real utility
Now aside from all the rides in hypes around the cryptocurrencies in general. There are those out there who believe in this technology. And what it could mean in the future of financial exchange and in worldwide commerce.
What are the basic underlined premises of cryptocurrencies is that they do away with banks completely? That’s huge. But this idea had made some banks to keep an eye on crypto.
Beyond banks, Cryptocurrencies also mean a universal currency. This could be very good for those who are living in underdeveloped nations. At the end of the day, Despite its volatile and uncertain nature. Cryptocurrencies do have some serious worldwide political implications.
Finally, Make your precious investments in few popular coins rather than a few cheap meme coins.