If you want to know about “cryptocurrency” in simpler terms, then you are at the right place. Today, in this article, I will inform you about all aspects of the virtual currency, as it has become a new talk of town..
What Is Cryptocurrency?
A crypto currency is a digital or virtual currency that is independent of the conventional banking system. This currency does not require the transactions to be verified by any conventional bank, but have their own digital system to keep fool-proof record of the transactions.
This currency is secured by cryptography and hence can’t be manipulated, counterfeited or double spent. It is different from the physical money and the main difference is that it is virtual in nature and exists only as a digital entry to an online data base acting similar to a ledger in the conventional banking system. This data base (digital ledger) is distributed in a large network of computers, hence it is not having a control at one place. So crypto currency is also known as decentralised currency. Since it is not controlled by a single authority, therefore is it free from any governmental interference or manipulation.
When you want to buy some cryptocurrency, you are assigned an account called digital wallet in your name. Any transaction that occurs between a wallet and a digital ledger, it is secured by advanced coding.
Cryptocurrency Simplified
Imagine that there are two persons “Rahul” and “Sam“. Lets suppose that Rahul owes a sum of 10 Dollars to Sam. Rahul wants to send these 10 Dollars through a conventional bank to Sam, but it is a time consuming process. In addidtion, the banking authorities will also charge some fee for this transaction.
What if Rahul decides (with the consent of Sam) that instead of paying 10 Dollars in physical form, he will pay something (worth 10 Dollars) in digital format to him. This item sent to Sam in digital format will work as a means of transaction betwen the two persons, so it will be called a digital currency . Let’s call it Rahulcoin.
You might think now that what if Rahul owes other 10 Dollars to “Kat” also and what if he sent the same item in digital format to Kat also. So in this way he doubly spent his digital currency. This problem can also be solved, if all the transactions made by Rahul are recorded in a software and, every time he tries to send an item in digital format to some one, it is automatically checked whether the item has been used earlier or not. This online system, where the records of all transactions are kept, is known as Digital Ledger. Owing to the presence of this Digital Ledger, Rahul can not send the earlier Rahulcoin ( sent already to Sam) to Kat, but will have to send a new coin to her.
Now the Rahulcoins recieved by Sam and Kat might be used by them for further transactions with other persons and in this way this digital currency will come into market.
Another question, that might have popped into your mind is that since these Rahulcoins are digital in nature, so people might easily reproduce them and hackers might try to hack and steal them. This problem can be solved if we secure them by advanced level of coding (called encryption) and make them secure from all kinds of adversaries. Since the Rahulcoin has now been encrypted, so it will be considered as a Cryptocurrency (which means encrypted currency).
In the above transaction, you might have noticed that there was no involvement of any third party regulator/authority/bank and it occured between two individuals directly. Such a transaction that occurs between two equals is an important feature of cryptocurrencies and is known as “Peer to Peer Transaction“. This peer to peer transaction enables two persons to recieve and give payments anywhere in the world.
Now the another question arises. Who controls these Rahulcoins– Rahul, Sam or Kat or any other authority. Unlike conventional currencies ( also called fiat currencies) where a central authority controls and regulates the currency, in Rahulcoins, the control is vested in a network of various users/computers, which might include Rahul, Sam, Kat and others. So, we can say that the control in case of Rahulcoins is not vested in a single authority and hence it is not a centralised currency. Therefore, we can say that the digital ledgers in case of Rahulcoins has a decentralised control. Such a decentralised digital ledger is called a Blockchain.
Why The Name Cryptocurrency
The name cryptocurrency has been essentially given as this currency is backed by cryptography. Cryptography is a technique of securing information before it is sent over a network to prevent it from an adversary. When a transaction occurs over a network, it is encrypted to make it immune from any kind of hacking attempts. It eliminates the role of banks and intermediaries in a transaction.
This cryptography helps in verification of data integrity, maintenance of Blockchain and securing the address and transactions of the users. It also helps in preventing frauds done by or on behalf of any user.
What Is Blockchain Technology?
Block chain is a decentralised ledger in which data is stored in a chronological order. The data is first stored in blocks and the blocks are then linked with each other in order of time. The block that gets stored with data first gets linked to the chain first and the block that gets stored with data later gets linked to the blockchain later. Such a structure consisting of chain of blocks linked with each other is called a Blockchain.
The data stored in Blockchain is open, permanent and verifiable by all the users. As soon as any transaction is done, it gets stored as a piece of data in a block. This block is first verified by the network of users and then allowed to get added to the blockchain.
If any data stored in Blockchain is to be changed, it can be done only if the rest of the users in the network agree to it. Similarly, if any ill motived user wants to change the records, he won’t be able to do so as it will require the agreement of all other users. This is the feature that makes the records in a block chain irreversible and tamper proof.
“In the above example, the first transaction occured between Rahul and Sam (suppose at 10am). This transaction data will get stored in a block and let’s call that block 1. Suppose Sam sent the Rahulcoin received by her to Tom (suppose at 11am). The information related to it will also get stored in a block, and let’s call that Block 2.
Now to keep record of all the Rahulcoin transactions, the two Blocks will be linked and a Blockchain will get formed. In this Blockchain, the first block will be Block 1 and with it Block 2 will be linked. This is called chronological ordering.
What will happen, if in the Blockchain, Block 2 is the first block and with it Block 1 is linked. That is the later block got into the blockchain earlier and the earlier block got into it later in time. As soon as the Block 2 gets added, the users on the network will try to acertain its validity. Since they will not be able find its history in the earlier blocks, as the block containing information about how Sam got this Rahulcoin, is contained in Block 1, which is yet to be added in the chain. They will invalidate this transaction.
And, since the block containing data related to transaction between Rahul and Sam ( contained in Block 1) has not been recorded yet, Rahul will be able to send the same Rahulcoin (the same one sent to Sam) to other persons also. In this way, Rahul will be able to double spend a single Rahulcoin.”
Also Check: How to invest money in Cryptocurrency?