How Cryptocurrency works (for Beginners)
Think of cryptocurrency as your usual fiat money for example USD/Euro/UGX. One takes fiat to the bank to deposit it on he's account. Whenever he needs it, or wants to transfer it to someone, he goes to the bank to process a transaction and the agents at the bank have to verify the transaction to prove it's legitimacy before approving it.
Now in cryptocurrency, the same activity takes place but rather than agents, it's computers in the network that verify the transactions using a technology called Cryptography.
According to Oxford dictionary,
Cryptocurrency is a digital currency whose transactions are verified and records maintained by a decentralized system using cryptography rather than by a centralized authority.
And while Fiat money is controlled by government entities since it's a government issued legal tender, Cryptocurrencies are not controlled by any entity. They rely on Blockchain technology which is decentralized.
HISTORY OF CRYPTOCURRENCY
As we can all admit, one of the most famous terms in the world of cryptocurrency is Bitcoin.
Bitcoin was the first cryptocurrency and the first product of Blockchain dating back in 2009 when it was developed by a programmer under the pseudo name 'Satoshi Nakamoto' who described it as a 'peer to peer' version of electronic money in he's white paper.
From 2009, Bitcoin was the only cryptocurrency in the space until 2011 when various developers noticed gaps in it and started creating alternative coins which we term as 'alt coins' to improve security, speed, apply other use cases among others. As of today, more than 10,000 have been developed.
BLOCKCHAIN TECHNOLOGY
When you talk of cryptocurrency, you can't leave out Blockchain technology. Remember cryptocurrencies are decentralized, the reason for this being they are built on Blockchain technology which relies on every computer in the network to confirm transactions instead of relying a single entity like fiat money does.
In summary Blockchain is an immutable publicly distributed ledger technology.
- Immutable - meaning anything recorded on it for example transaction can not be tempered with. This is how it has won trust.
- Distributed ledger - meaning records of transactions are stored in multiple places on a computer network.
Data for example transactions or medical records is stored in a block and it's linked to the previous block which is also linked to the block before that and they go on in that format forming a chain of blocks hence the name Blockchain.
Since the blocks are linked to each other, this leads to the high level of security cryptocurrency and Blockchain are known for. Inorder to temper with one block, one has to first temper with all the other blocks linked to it.
Another way security has been maintained is through the peer-to-peer network, also called P2P. Remember it's publicly distributed.
Whenever a new block is created, it is sent to everyone in the network to verify it and later add it to their respective Blockchain after approving. Interfering with a block would mean convincing everyone in the network to accept your changes which is impossible.
These are among the few ways that make Blockchain's security nearly impossible to breach and thus making the public to be drawn to it.
Top Cryptocurrencies
There are many Cryptocurrencies doing well but the two that stand out are Bitcoin and Ethereum.
Bitcoin has a well established ecosystem of software which has made it valuable by a huge margin to the next one to it which ofcourse is Ethereum.
Below are 5 of the largest Cryptocurrencies by market capitalization as of 28/04/2022.
| Rank | Name | Market Cap |
|---|---|---|
| 1. | Bitcoin | $749 billion |
| 2. | Ethereum | $350 billion |
| 3. | Tether | $83 billion |
| 4. | BNB | $65 billion |
| 5. | USD Coin | $49 billion |
Cryptocurrency Mining
Mining Cryptocurrencies is different from the mining of minerals from the ground. Here Computers that are used to verify transactions on the Blockchain.
When a miner verifies a block, he/she is rewarded with Cryptocurrencies and also receives a percentage of fees from the transacting parties.
This work needs a computer with high energy-efficient processors to cut on the consumption of electricity. With the right computer you just have to set up a Cryptocurrency wallet and software for mining. Internet as well has to be available all day.
How cryptocurrency works
Inorder to start doing Cryptocurrency transactions, you have to possess a wallet. A crypto wallet enables you to store safely and access your Cryptocurrency coins.
There are various Cryptocurrency wallets in the space, you can look them up on Google and choose what suits you best in accordance with the security, accessibility or ease of use.
The wallets provide private and public keys that you use to access your funds allowing you to send and receive Cryptocurrencies.
After obtaining a wallet, you will have to get a Cryptocurrency exchange with which you'll buy or sell Cryptocurrency. It's on these exchanges that you trade one Cryptocurrency for another and some exchanges even allow trading Fiat for Crypto or Crypto for Fiat. There are various Cryptocurrency exchanges to choose from, starting from Binance, Coinbase among others.
Whenever your transacting Cryptocurrency, your authorizing the movement of funds from your wallet to another or from another wallet to yours. This transaction is encrypted with the private key which Cryptocurrency miners confirm after accessing the public key.
The miners confirm the block that includes your transaction and update the ledger to show your new balance and the balance of the other wallet your dealing with. All the process goes on using a computer program.
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