What is Cryptocurrency ?
Crypto Crypto CryptoCurrency. Yes I said it! The most hyped topic and the one you just cannot unsee when it comes to alternative forms of currency. In the past few months cryptocurrency has gained a lot of attention, but the question is what is Cryptocurrency? What is BlockChain? Let's break it down.
Cryptocurrency is a decentralized virtual or digital currency. So what does that mean? Regular bills and coins are what we have used over the years to represent value. You perform an action dealing with money and suddenly that action has more value than if it was done for free. The value of that action is derived from how difficult the action you did was in most cases. Most currencies in the world have one central location, for the USD($) it is USA, for the Rupee (₹) it's India and so on. Cryptocurrency on the other hand does not exist in any physical form, so you would need a way to represent its virtual value. This value is thus represented or proved by transaction records.
For example, when you transfer money to Bob for building you a house or buying a car, you send him a payment in your cryptocurrency of choice, say 10 BTC (bitcoin), when you initiate this transaction the previous transactions of these 10 BTC get baked into this transaction to show that these coins exist and that they have been used in the past providing validity of the coins. Also all transactions are public.
Cryptocurrency is found on the basis of hash functions. A hash function is a mathematical function that encrypts a message. The way it works is, you provide the hash function with an input and it applies a few mathematical algorithms to it to provide an encrypted message of the original input as an output. These algorithms are entirely dependant upon the currency which is being transacted at that time. The output it provides depends on the hash function being used and the same hash function provides the same output given a similar input.
With cryptocurrency, it is important to validate the authenticity of the coin making sure that no two people get the same 10 BTC and this is where the term "Miners" steps in. A miner is a person that uses a computer to solve complex computational puzzles. In the real world if you ask Bob to build you a house, the built house then acts as a proof of work. The same is with these puzzles. They are really hard to solve and take a lot of time, so solving this puzzle acts as a proof of work. The way to solve them is by sending inputs to a hashing function until the decided output is generated and this requires millions if not trillions of attempts to solve.
Every time a transaction is made a new puzzle gets produced that the miners can then try to solve. The puzzle is based on the input of the past transactions and if anything has been falsified the miners can verify that and reject the payment. All the previously made transactions validate and contribute to each new transaction so in this way it becomes virtually impossible to rig the system. This is the base for decentralization.
After the transaction is completed it is then integrated into a block. This block further gets integrated into a chain of blocks that represents the cryptocurrency. This is where the term "BlockChain" is derived from.
I hope this gave you some insight into what cryptocurrency is and how it works. As for the future, this technology has already gained a lot of popularity and has the potential to result in further radical changes in the financial sector. However, it is not without its downsides and controversies, so investors must be mindful of fraudulent transactions while dealing with it.
