Cryptocurrency ABCs: The Letter C
Entering the world of cryptocurrency for the first time can be difficult. Learning all the terminology can be confusing and it is easy to feel overwhelmed. If you find yourself asking “What is cryptocurrency” you’ll find many answers to ground you in the alt coin knowledge here.
In this series, Cryptocurrency ABCs, we are going to cover important cryptocurrency terms and concepts from A-Z! Each posted lesson will cover a topic based off a letter in the alphabet.
Let’s cover the letter C!
What is Cryptocurrency
When asking people “What is cryptocurrency?”, often times they will tell you that it is “digital money”. That is true but in reality, most money is already digital.
Every year there are less and less people using cash and more transactions using credit cards, smart phones or the internet. These transactions are all digital, changing numbers in a database, so what is it that makes something a cryptocurrency?
The current financial payment system relies on a complex web of institutions and financial services. Bitcoin, the first cryptocurrency, was designed to create a peer-to-peer network that would not rely on a single authority or institution.
Before Bitcoin, there had been several attempts to create digital cash that all failed. Satoshi Nakamoto, the creator of Bitcoin, was able to solve a long-standing issue called the “double spend” problem. Double spending is when the same entity spends the same amount twice. In traditional payment services, this is prevented by a central authority that maintains a record of account balances.
In a decentralized system there is no central authority. There needs to be a mechanism through which the entire network can agree on transactions. Satoshi accomplished this with “consensus”.
Bitcoin uses a network of “miners” to confirm transactions. Once a miner confirms a transaction, it is added to the blockchain and every node must add it to its database. A node refers to a “full” client. A “full” client is a client that contains the entire blockchain and is sharing blocks and transaction across the network. This transaction is now permanent, it cannot be forged, duplicated or removed. Bitcoin nodes keep the Bitcoin blockchain’s peerto-peer network running.
Miners are needed to maintain the network and keep it secure. Miners solve difficult cryptographic puzzles and after finding the solution, add a block to the blockchain. In return, the miners receive a reward of Bitcoin. This is how Bitcoin is created. The term cryptocurrency comes from the important function that cryptography plays in the system.
Removing a central authority and decentralizing the payment network allows cryptocurrency to do some other unique things when compared to our current monetary system.
First of all, as previously mentioned, Bitcoin cannot be printed or issued by a bank. Bitcoin is mined and the total supply is limited to 21 million BTC. This means there is no central bank that can inflate or manipulate the currency. In the past, the only authority that could issue currency was governments however, cryptocurrency allows anyone with the right knowledge to create and deploy their own coin.
Cryptocurrency gives incredible power to the people, allowing anyone to have total control over the storage of their own currency. This allows you to “be your own bank”. Instead of a bank account you can set up a wallet that you control.
Cryptocurrency Wallets and Transactions
Your wallet gives you an address you can use to send or receive cryptocurrency. These transactions are pseudonymous and do not require you to go through a bank or payment provider. There is no personal information associated with your wallet.
Cryptocurrency also allows for fast, cheap, secure and international transactions. A typical credit card transaction may require several service providers or institutions to complete. Cryptocurrency allows you to send funds anywhere, quickly and with relatively low fees.
Both the current financial system and cryptocurrency are both, at their core, databases storing accounts and transactions. What makes Bitcoin special is that it democratizes money and creates a system that does not require trust to function. That is one of the best ways to describe “What is cryptocurrency”.
All transactions are secure, permanent and public. Bitcoin allows users to have the benefits of cash with direct and pseudonymous transactions while also having the benefits of a digital payment system.
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Stay tuned for Cryptocurrency ABCs: The letter D!