What is Cryptocurrency and How Does It Work?

Understanding Cryptocurrency and How It Works

As the world becomes more technologically advanced every day, it has become expedient; more than ever, the need to get acquainted with cryptocurrency, its uses and advantages, how it works, and the impact it has on us all.

Cryptocurrency has grown over the last few years in leaps and bounds due to its appeal to people looking for an alternative means of exchange (alternative money). The most amazing thing about cryptocurrency is that it is decentralized and this makes it impossible for banks or other financial authorities to exercise control over it. Also, its users operate anonymously which makes transactions difficult to trace to particular individuals or groups. Cryptocurrency has the potential to change the world through its applications, especially with its use as an alternative for financial transactions.

What is cryptocurrency?

Cryptocurrency is an exchange internet-based medium that uses crypto-graphical functions to process financial transactions. It is a digital asset solely designed to work as a medium by which funds are transferred between two parties or more by using strong cryptography to ensure that financial transactions are secure. They also control and create additional units and verify the transfer of assets.

This digital means of exchange can be created and used by both private individuals and groups. Cryptocurrencies are not regulated by the government, therefore they are considered alternative currencies (mediums of financial exchange that exist outside the bounds of state monetary policy).

The entries in a cryptocurrency database cannot be changed by anyone; without fulfilling specific conditions.

An essential component of cryptocurrency is blockchain; which is an organizational method for ensuring the integrity of transactional data.

Characteristics of a Cryptocurrency System

1. The system does not require a central authority. It is maintained through decentralized control.

2. The system used in cryptocurrency keeps an overview of all cryptocurrency units and their ownership.

3. Whether new cryptocurrency units can be created or not is determined by the system. Thus, when the system determines that new units can be created, the circumstances of their origin and the ownership of the units would then be determined by the system. That means, it is not controlled by the central bank or any other financial agency.

4. The ownership of cryptocurrency units can only be proved cryptographically.

5. The system allows transactions to be performed in which ownership of the cryptographic unit is changed. A transaction statement can only be issued by an entity that proves the current ownership of those units.

6. When two entirely different commands are issued to change the ownership of the same cryptographic unit at the same time, the system performs only one of them.

Types of cryptocurrency

Although there are thousands of cryptocurrencies with different functions and specificities like Peercoin, Litecoin, and Namecoin. Bitcoin is the first and most popular block-chain based cryptocurrency. It was launched in 2009 and by November 2019, there are over 18 million bitcoins in circulation with a total market value of about 165 billion in dollars.

How does cryptocurrency work?

Cryptocurrency protocols are built by developers on advanced math and computer engineering principles. This principle confers on them an impossibility to break. Thus, these protected currencies cannot be duplicated or counterfeited. The protocols installed by the developers also aid in masking the identity of crypto users thus, funds flow and transactions are difficult to trace to particular individuals or groups.

As already established, cryptocurrency is used as a digital exchange platform for financial transactions. This system allows for secure payments online in terms of virtual tokens represented by ledger entries into an internal system.

Many encryption algorithms and cryptographic techniques are used to safeguard the financial entries such as; elliptical curve encryption, public-private key repairs, and hashing functions.

Application of Cryptocurrency

1. Wealth management

A few companies like SwissBorg have created safe tokens for investment solutions. Investors have thus been given great opportunities to manage their wealth without boundaries with the use of cryptocurrency.

2. Education

The use of cryptocurrency as a form of payment is already been explored by many schools. Universities in Switzerland, Germany, Cyprus, and the United States have already adopted this means of payment. With the way cryptocurrency is growing fast; in years to come this currency will be adopted by almost every educational institute.

3. Fund-raising

Instead of using the traditional means of raising funds via sponsors or fundraising websites, many start-up companies are now using cryptocurrency to fund ideas.

4. Travel

Travel agencies such as CHAIR PAIR have been accepting bitcoins since 2013 as a means of payment for flights, hotels, car rentals, and boat cruises.

Advantages of Cryptocurrency

1. Transfer of assets

Blockchain cryptocurrencies have been used to aid specialist modes of transfer. It can be used to execute contracts between two parties on different commodities like; automobile parts and real estate properties. As a cryptocurrency holder, you hold the authority over your account and this helps to minimize the time and expense involved in making assets transfer.

2. Your transactions are confidential

Unlike the regular banking system where your online and physical transactions involving credit and cash may be documented by the bank for references later, cryptocurrency keeps your transactions confidential. Again, each transaction you make with cryptocurrency is a unique exchange between two parties. During the transactions, you can transmit exactly what you wish to send to the different recipients without any form of a security breach that causes any detail of the transactions to become public. Cryptocurrency ensures that you and all your financial histories are guarded and protected from identity theft.

3. No transaction fees

Since data miners responsible for doing the number crunches that generate bitcoin and other cryptocurrencies receive their compensation from the cryptocurrency network, transaction fees are usually not required. But in cases where you require a third-party management service to maintain your cryptocurrency wallet, you may be charged some external fees. These charges are usually much less than the transactional charges demanded by banks and other financial institutions.

4. Easier international trade system

Using the peer-to-peer mechanism blockchain offers, international transactions are made easier. Blockchain technology cross-border transfers and transactions may be conducted without exchange fluctuations. Cryptocurrency technology is by no means subject to exchange rates, interest rates, or any form of transaction charges or fees incurred by specific countries.

Everything that has an advantage also has a disadvantage and cryptocurrency is not an exemption to this law. Since cryptocurrency is not regulated or monitored, there is a possibility of users falling prey to different Ponzi schemes. Cryptocurrency is not un-hackable therefore, users must be security conscious to avoid their having their accounts hacked and their wallets explored by unauthorized persons. The untraceable nature of cryptocurrency and the ability of its users to stay anonymous has made it easy for internet fraudsters to use it as a platform to obtain money illegally from foreigners.