What is Cryptocurrency. What is Blockchain?

3 years ago

You undoubtedly know about cryptocurrencies, but what goes behind the curtains of this phenomenon? And what makes these digital money a trustworthy and independent payment method?

The definition of cryptocurrency made its first appearance in 2011, in the Forbes magazine article. Satoshi Nakamoto, the legendary author of the first cryptocurrency called Bitcoin, preferred to call it e-cash.

Today, when we talk about cryptocurrencies, we define them as digital money that are developed using cryptographic methods. They don’t have physical counterparts and they are independent from governments, banks, and other third parties.

In the foundation of a cryptocurrency is its open source code that is written in one of the programming languages. The openness of the code is a guarantee that the developers, meaning the authors of the code, have set transparent and fair rules of the cryptocurrency circulation.

Cryptocurrency emission and transactions are processed with a help of the blockchain technology. It features unchangeable chain of blocks, each of which contains information about the previous blocks. The only exception is the very first block. Blockchain is a highly secured database because:

  1. It is impossible to reverse the information of the block that was already accepted by the network.
  2. New block is created only if its data is agreed upon with the previous blocks of information.
  3. Each network participant possesses a copy of all chain records.

Blockchain is decentralized, there is no command center that can be hacked and used to destroy or edit the data. All operations inside the blockchain are transparent, while the history of all times cannot be deleted.

To understand precisely what blockchain is, picture an accounting book with the list of all transactions. Now picture this book in many copies that are stored in computers throughout the whole world.

In order to confirm a transaction, blockchain compares these accounting book copies of all users. And if this information is matched, then the transaction has been confirmed. If there is a data inconsistency during this process, like if someone wants to send more cryptocurrency than they have at a moment, then this transaction gets declined.

Blockchain reliably protects the funds of the users because it is impossible to hack. For this trick, hackers would have to control at least fifty one percent of network hash rate. But even in this case, the odds of recording false data are very small.

However, such high reliability has its downsides because blockchain is irreversible. If you send money to the wrong receiver, it would be impossible to cancel the transaction.

For Bitcoin, the owner of the wallet is the one who knows the access keys. The loss of these keys is equivalent to losing all the cryptocurrency. Of course it will stay on the account, but it’s going to be inaccessible.

Let’s conclude things. Cryptocurrency is a virtual money that is created with a help of cryptography, and powered by blockchain technology. These funds are uncontrollable and all transactions are completed between the receiver and the sender, no third parties included. The owner of the cryptocurrency is a person who possesses the access keys for their wallet.