If you have never heard of the term “cryptocurrency” let me break it down for you. In this case the word “crypto” is used as a reference to Cryptography which involves the use of mathematics, computer science, and electrical engineering to secure data. And as you should know the word “currency” usually refers to money as a medium of exchange. When you put the two together it means currencies that use Cryptography to secure the transactions and to control the creation of new units.
What Cryptocurrencies Are
In the most basic definition cryptocurrencies are currencies that use Cryptography to secure the transactions and to control the creation of new units. If you have ever heard of cryptocurrencies then you have probably heard of Bitcoin. Bitcoin is the most popular cryptocurrency today and it was the first cryptocurrency to be created in 2009. Ever since then there have been a lot more cryptocurrencies that have been created like Litecoin, Dogecoin, Mastercoin, MazaCoin, and Namecoin.
How Cryptocurrencies Work
If you have never heard of cryptocurrencies then you are reading this and probably wondering ‘how in the world does this work?’ and the truth is that from the technical side of it there is too much to explain in one article or even two articles. You could spend hours of class time on this and still not completely understand how each and every cryptocurrency works. I will try to explain in general how cryptocurrencies work. The first thing you should know is all of the cryptocurrencies use the same basic technology and they all originated from the same ancestor which is Bitcoin. This goes back to why we need software to be open source, so everyone can review the source code and create their own distributions if they have the desire to. Throughout this article I will refer to Bitcoin a lot because it was the first cryptocurrency to be created and is the most successful as of August 2014.
One of the major differences between the cryptocurrencies is that many of them use different hashing algorithms to process the transactions or blocks. A hashing algorithm is commonly referred to as a hash function. A hash function in Cryptography is a function that is used to scramble (so to speak) the input data from the output data. The most common hashing algorithms used for cryptocurrencies are SHA-256 and scrypt.
When you are dealing with cryptocurrencies mining is what the nodes that make up the network do. The process of mining can be a bit confusing to someone who is just now learning about cryptocurrencies. Basically all the “miners” are doing on the network is processing the transactions that people are making, which can also be referred to as cryptographic hashing. This goes back to where I talked about hashing algorithms. The hashing algorithms are the algorithms used for Cryptographic hashing. Mining can also be a way to make more Bitcoins. If you are mining on the Bitcoin network then you are helping to generate more Bitcoins. When you are dealing with mining you might also come across something called pool mining. Pool mining is basically the same thing as mining except you are mining with a group of people where you are all working together. Pool mining is very common with cryptocurrencies such as Bitcoin due to the fact that Bitcoins are mined in blocks of 40 and because the network is so big. I will have another article on mining later but all you need to understand, if you just want to use the cryptocurrencies as you would with a regular currency, is what I described above.
Asymmetric cryptography is what makes cryptocurrencies possible. Asymmetric cryptography is also known as public-key cryptography. If you have never heard of a digital signature then you can think of it as your actual signature. With your actual signature the purpose is to connect a document to you and verify that you are the correct person who signed the document. With digital signatures the same is true except it is digital and is done through the process of public-key cryptography.
In asymmetric cryptography public keys are used to encrypt data and verify the identity of the person who is sending the encrypted data. Your public keys can be known to anyone anywhere. In fact when it comes to cryptocurrencies you should make your public key known to everyone you can because it will increase the chance that someone might send you Bitcoins. When you are talking about cryptocurrencies public keys are used in the same way except they are used as “addresses” to exchange the currency. So, for example, with Bitcoin you will have a “Bitcoin address” which is really the cryptographic hash of someone’s public key and that public key will be used to send Bitcoins to the owner of the private key that corresponds with the public key.
In asymmetric cryptography private keys are used to decrypt data. You should always keep your private key private; otherwise someone could decrypt the data that you send to someone, or with cryptocurrencies, steal you’re Bitcoins. When you are talking about cryptocurrencies private keys are used in the same way except we are not dealing with documents we are dealing with Bitcoins.
Transaction Block Chains
A transaction block is basically just a bunch of transactions that have been combined into one block. A block chain is a chain of blocks that have been combined together to make up the entire history of a cryptocurrency. Using the block chain you can view every transaction that has ever occurred in the history of Bitcoin. This is all organized thanks to the use of transaction block chains. There is also a special kind of transaction called a coinbase transaction. This type of transaction has no inputs. It is created by the miners when they are processing all of the other transactions in the network. There is only one coinbase transaction per block. This process is how the Bitcoins are created. There will only be 21 million bitcoins; after that, the miners will be paid from the fees collected by the people sending the Bitcoins (which is not much). As of August 2014 there are 13 million bitcoins and 25 bitcoins per block approximately every ten minutes a new block is created.
What All of This Means
cryptocurrencies have a very important role in today’s world, which is that they give us an alternative to regular banks. As I am sure many of you know regular banks have a lot of different fees, regulations, and other problems. When you put a cryptocurrency like Bitcoin in the picture the fees go down to pennies, there are no regulations, and there are usually not any other problems. A lot of people don’t like cryptocurrencies because their Bitcoins get stolen and they say the technology is insecure. The truth of the matter is that the people whose Bitcoins get stolen usually keep their Bitcoins on their smartphones or on a computer which they use to do their everyday web browsing on. If you have any amount of Bitcoins that you want to keep safe you need to keep them on a dedicated server or computer that does nothing else but keep track of all of your Bitcoins. The dedicated server or computer does not have to be a very high end one; it can just be a cheap $200 laptop. The computer or server does not even have to stay online all of the time. In fact it can stay off all of the time until you want to send you’re Bitcoins. This is even more secure because it then makes it impossible for someone to steal your Bitcoins while your computer is offline. The only time your dedicated computer or server comes into play is when you need to send Bitcoins, because it contains your private key which is required to send bitcoins using your public key. These are basic security practices that need to be fulfilled before you start investing your money in a cryptocurrency like Bitcoin. These Bitcoins are not like regular money that you have in a safe or stuffed in your mattress. This is digital money which will most likely not be stolen by someone physically breaking into your house and taking your hard drive, this digital money will most likely be stolen by your computer getting a virus and then a hacker getting access to your computer. Once you have a secure environment for your digital money then you can start to send and receive Bitcoins. If you use a cryptocurrency like Bitcoin then you are free from one central power (like a government) controlling your money and, most of all, free from your bank. Your bank will no longer have control of your money- you will.
Thank you all for taking the time to read this post and as always God bless!