Cryptocurrencies are widely common in this day and age. Whether it is the person selling hotdogs on the street or a guy you see everyday on the bus, everyone knows about cryptocurrency. However, the real question is, do you?
Let’s face it: you can’t become an expert on this thriving technology by reading a couple of articles here and there. If you want to stay on top of the cryptocurrency trading game then it is best that you start off by gaining knowledge of the basic principles that integrate this fast-growing technology.
What is cryptocurrency
To simplify, cryptocurrency is a virtual currency in which cryptography is used in order to make the process safe. The element of fraud is significantly minimized with cryptocurrency because of this high security feature. So, this, in turn makes online payments safer by a tenfold.
If there is a concept that shares the similar level of ubiquity with cryptocurrency, it is decentralization. Since, the cryptocurrency isn’t monitored by a central administration it practically becomes immune to any government lead fluctuations or interference.
From diversification and volatility to increased potential and quicker return, there is a plethora of benefits that are associated with cryptocurrency.
However, one important factor to keep in mind for traders is that if they aren’t considering keeping the cryptocurrency with them for the long haul then it might become a bit tricky to get it traded.
How cryptocurrency emerged?
Most people know that cryptocurrencies came into being as a byproduct of the other rather famously known invention known as Bitcoin. Satoshi Nakamoto, the inventor of Bitcoin never actually meant to create a currency. In 2008 Nakamoto said that he merely wanted to create something which most inventors failed to create prior to the age of digital cash.
Perhaps the most important side product of Nakamoto’s invention was that he learned how to create a distributed virtual cash system. A score ago so many failed attempts were made to create a virtual currency but all those efforts went in vain.
Nakamoto, after seeing all the failed attempts, focused on creating a P2P network for making payments just how it is used for sharing of files. This decision is what led to the inception of cryptocurrency. To simplify, this was the missing piece Nakamoto needed in order to complete the puzzle of digital cash. Let us make it easier for you to understand why cryptocurrency was necessary.
To initiate digital cash payments, you need a payment system with a valid account and balance, which is understandable. The concept which is harder to grasp is that every payment network needs a system that can prevent overspending or double spending by a single account. So, in order to keep this from happening, a central authority is needed in the equation.
Fuad Ahmed says that in a decentralized setting, every respective entity of the network takes care of this task which is why they don’t have this server. In a decentralized network, each peer would need to have a list with details of all the payments made or received in order to validate the future transactions and keep the members from double spending.
The question here arises that how these entities keep a consensus of the data?
If the peers on the network don’t mutually agree even about a negligible balance on an account, everything can be jeopardized. So, a complete consensus needs to be prevalent. So, typically a central authority is required to declare the actual state of the balance but how do you come to an agreement without a central body?
No one was aware of this answer until Nakamoto revealed it in 2008 out of the blue. Most people were skeptical that it was even possible. Nakamoto proved that it was within the realms of possibility with the revolutionary concept of cryptocurrency.
So, what are cryptocurrencies exactly?
If you take away all the different definitions that revolve around cryptocurrency and define it in its simplest form then it is basically a network with data that can’t be altered unless certain conditions are met. This may seem simple when you first hear it but this in reality is how currencies are basically defined.
What are the main characteristics of cryptocurrency?
People who are still skeptical about cryptocurrency and often ask “what is so special about cryptocurrency?” then we believe the following characteristics will answer their queries.
Cryptocurrency doesn’t require for the people in the network to build a trust prior to making any cash exchanges. It was built in a way that trust wouldn’t be required between the members for operating.
Prior to cryptocurrency, a central authority was required which people trusted with their money and life savings. The central authority becomes the main body that more often than not leads to the demise of the currency. However, that is no longer an issue now.
With cryptocurrency, in order to validate a request all members on the network need to approve it before it is proceeded further. So, the element of trust isn’t needed. Members just have to verify the transaction and the request can be completed.
Every single member on the network contains the spreadsheet where entries are recorded which removes the need for a single ledger monitored and controlled by a single central authority. This decentralized ledger is what is rather famously known as blockchain which has shown a lot of potential in the last couple of years and the 2018 has been remarkable for its development.
Immutable in its simplest definition means “can’t be undone.”
To get a record of the money we have spent, we get a balance sheet from our bank account where all the transactions are mentioned. We wouldn’t want the transaction history to be fraudulent or manipulated as that’d sway our trust in that bank. However, like we have already discussed that trust doesn’t remain a debatable factor with cryptocurrency, we no longer require a third party to manage our transactions for us, which is why, the data of transaction is made public and everyone is given the access to see it. This makes the record on the blockchain immutable. Although, it isn’t impossible to alter the transaction record, it is highly difficult.
A defining feature of cryptocurrency, and probably the most relevant one is the concept of decentralization.
Cryptocurrency is based on the concept of a distributed ledger which lets all the members of a network get a copy of the spreadsheet instead of it being overseen and controlled by a single party.
With this article we hope that your understanding of cryptocurrency has evolved. If next time someone asks you what is so unique about cryptocurrency, you can give them a class on the above 3 key characteristics.