Cryptocurrencies - what hides behind this name?

25.06.2020 08:00|Conotoxia.com

Decentralized currency, the money of the future or maybe a scattered accounting system containing data on the ownership in agreed units? Cryptocurrencies can be described in many ways. Nevertheless, they arouse many emotions - not only among investors. Here is all you need to know about the virtual currencies.

Cryptocurrencies - what hides behind this name

Cryptocurrencies - virtual money

To describe a cryptocurrency in the simplest way we should define it as a virtual currency, which does not have its physical form. You can use it to pay for selected goods and services if the seller accepts such kind of payment. Therefore, cryptocurrencies have their value, so they can be called virtual money.

Many of the currently known cryptocurrencies work on a similar principle. They use a decentralized system, mostly based on blockchain, or chain of blocks.

A blockchain is a public registry of transactions executed using a given cryptocurrency. It is supported and updated on an ongoing basis by many people and, being accurate, many computers. For the calculations, they receive a reward in the form of cryptocurrency units or their smaller parts. This activity is commonly called mining, and the people who do it are miners.

It is worth mentioning that cryptocurrencies use cryptography technology to record and verify transactions, i.e. complicated mathematical calculations to encrypt information.

The transaction involving cryptocurrencies takes place directly between its parties, and only they have full access to them due to appropriate encryption keys. However, the accounting register itself is publicly available.

Given the characteristics of the blockchain, neither the cryptocurrencies nor the transaction with their use can be forged.

Decentralized control - the most crucial feature of cryptocurrencies

One of the fundamental features of the cryptocurrencies is their decentralization. Virtual money functioning in the blockchain system is not dependent on the central authority. No organization has a direct influence upon cryptocurrencies. There is no way to decide on the size of their issuance or other methods of influencing their value.

All information about the cryptocurrencies is stored directly by the participants of the blockchain network, in consecutive blockchains. There is no central bank that has control over the virtual currency, so there is no interference with its functioning.

In theory, at least, the fact that cryptocurrencies are not issued by official authorities guarantees resistance to any kind of manipulation of the rate of a given cryptocurrency, e.g. by national governments.

What is decentralization all about? In the case of the traditional financial system, all transactions are carried out by individual entities, such as banks. If you want to send a transfer from your bank account, you have to use the offer of our bank. Without it, we would not be able to send money. So if suddenly someone would cut off the system of a chosen bank, its clients would be blocked from accessing their funds.

In the case of decentralization, such problems do not occur, because transactions are verified by many users at the same time. When one of them "falls out", his/her place is replaced by others, guaranteeing the proper functioning of the whole system.

This, of course, creates some disadvantages. For very popular cryptocurrency, the execution of transactions may take several or even several dozen minutes, because due to the number of verified transactions, the computing power offered by system participants will be insufficient to handle all queries immediately.

A scattered accounting system also generates enormous costs related to electricity. To confirm transactions with the use of complicated cryptography, the high computing power of computers participating in the network is needed. Cryptocurrencies based on a data chain are therefore not considered to be the most ecological.

Bitcoin

How to store cryptocurrencies and pay with them?

We have already mentioned that the virtual money can be obtained by mining it. You can also buy the cryptocurrencies on one of the many cryptocurrency exchanges. But how to store virtual money and pay with it?

So-called cryptocurrency wallets are used for this purpose. Each of them is characterized by two keys - public and private. The former can be easily shared with other people allowing them, for example, to transfer cryptocurrency to us. The second one - private - remains solely for our use. Thanks to it, we can "log in" to our own wallet and spend the cryptocurrency we have there. It is also used to encrypt transactions. Therefore, it can be treated as an access password. If someone takes over the private key, they will also take control over our cryptocurrency wallet.

These are the principles on which blockchain transactions are executed. These keys are used to verify the transaction between its participants. Then it is saved in the blockchain.

If the transaction is only between participants, why is there no fraud? Each cryptocurrency unit or part of it has a unique code. When entering a transaction into a distributed accounting register, its status on individual wallets is also stored.

Any attempts of fraud will be immediately detected and eliminated by the system, as each participant receives a copy of the executed transaction and then must confirm it. If one of the registers does not agree with the others, it is automatically deleted. This rule almost excludes the possibility of fraud in the system.

Therefore, when you pay using cryptocurrencies, it is like transferring them from one wallet to another with automatic verification of transactions by all participants of a given network. Of course, a given store or person must make such a form of payment available. As we have already mentioned, you can also trade on dedicated exchanges, buying or selling them at a specific rate.

It is worth noting that your cryptocurrency wallet is well protected. If you lose access to it, you will also lose the virtual money stored in it. There is no way to "recover" the access password. If you lose the aforementioned private key, you will be banned from accessing your wallet.

Types of cryptocurrency wallets

The cryptocurrency wallets can be divided into several types, differing from each other in terms of maintenance and security level. Among the variants can be the aforementioned cryptocurrency exchanges, where we store our virtual money. Such a solution has its disadvantages, however, because most often it involves passing on your keys to third parties (including private ones), so that, e.g. the exchange administrator can have access to our funds.

Cryptocurrencies can also be stored in software wallets, which are in the form of applications for mobile devices or, e.g. a computer. However, in case of such hardware failure, we may lose access to the cryptocurrencies if we do not create a data backup beforehand.

You can also create a cryptocurrency wallet on a piece of paper, saving your keys (public and private) on it. However, such a solution can be inconvenient. There is also a risk of losing a piece of data.

There are also hardware keys on the market, i.e. devices dedicated exclusively to cryptocurrency handling. They can occur in the form of, e.g. small key rings with a display. However, also, in this case, there is a possibility of their loss or failure - so without a proper backup, we can lose access to the cryptocurrencies we have.

The most popular cryptocurrencies

Cryptocurrencies - what hides behind this name

Bitcoin is, of course, the most popular virtual money, which is often called the king of cryptocurrencies. Bitcoin, based on blockchain technology, has made this means of payment famous. It is created by a person or group of people hiding under the pseudonym Satoshi Nakamoto.

Currently, apart from Bitcoin, there are thousands of other virtual currencies on the cryptocurrency market. The most popular ones include Ethereum, XRP, Tether, Litecoin and even Monero.

The list of a thousand cryptocurrencies with the highest capitalization and their current exchange rates in relation to the USD or Bitcoin can be found at Conotoxia.com.


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