What is Cryptocurrency and how does it work?
- 1. What is Cryptocurrency and how does it work? December 24, 2024 by hellorohitrai@gmail.com What is Cryptocurrency? Contents hide 1 What is Cryptocurrency? 1.1 Key Features of Cryptocurrency: 1.2 How Does Cryptocurrency Work? 1.3 Example of a Transaction: 1.4 Why is Cryptocurrency Popular? Cryptocurrency is a digital or virtual form of money that uses cryptographic technology to secure transactions. Unlike traditional currencies issued by governments (like USD or INR), cryptocurrencies operate on decentralized networks called blockchains. This eliminates the need for a central authority, such as a bank, to verify or manage transactions.
- 2. Key Features of Cryptocurrency: 1. Decentralization: Operates without a central authority. 2. Blockchain Technology: A transparent, secure, and immutable ledger records all transactions. 3. Limited Supply: Most cryptocurrencies have a capped supply, like Bitcoin’s 21 million limit. 4. Anonymity: Transactions are pseudonymous, offering privacy to users. 5. Global Accessibility: Cryptocurrencies can be sent and received across the globe quickly and cheaply.
- 3. How Does Cryptocurrency Work? 1. Blockchain Technology: Cryptocurrency transactions are recorded on a blockchain, a distributed ledger shared across a network of computers (nodes). Each block contains a group of verified transactions linked to the previous block, forming a secure chain. 2. Cryptography: Cryptocurrencies use advanced cryptographic techniques to
- 4. ensure data security and transaction authenticity. Public and private keys are used to send and receive funds securely. 3. Mining or Validation: ● Proof of Work (PoW): In this system, miners solve complex mathematical puzzles to validate transactions and add them to the blockchain (e.g., Bitcoin). ● Proof of Stake (PoS): Validators hold and “stake” their cryptocurrency to validate transactions (e.g., Ethereum 2.0). 4. Wallets: Cryptocurrencies are stored in digital wallets, which can be software-based (online or app wallets) or hardware-based (offline devices for enhanced security). 5. Transactions: ● Users initiate transactions by signing them with their private keys. ● Once broadcast to the network, nodes validate the transaction. ● After validation, the transaction is added to the blockchain. Example of a Transaction: 1. Alice wants to send 1 Bitcoin to Bob. 2. She uses her private key to initiate the transaction via her digital wallet. 3. The transaction is broadcast to the Bitcoin network. 4. Miners validate the transaction and add it to the blockchain. 5. Bob receives 1 Bitcoin in his wallet once the transaction is confirmed. Why is Cryptocurrency Popular?
- 5. ● Decentralization: No reliance on banks or intermediaries. ● Lower Costs: Minimal transaction fees compared to traditional banking systems. ● Global Reach: Accessible to anyone with an internet connection. ● Investment Potential: High volatility creates opportunities for profit (though it also carries risks). Cryptocurrency is reshaping the financial landscape, but it’s essential to understand its intricacies and risks before diving in