This is quite a commonly asked question. And why shouldn’t it be? Given the fact that it is all the world has been talking about for the past few years. Very few innovations have changed our world the way cryptocurrency has; it is safe to say that it has earned its stardom.
But even though a significant fraction of our population knows about Cryptocurrencies, a tiny portion of it understands what they actually are and how they work.
So if a giant question mark wafts out of your skull every time someone mentions Cryptocurrencies, I bring to you, the gift of knowledge.
So let’s dive right in!
Cryptocurrencies, like most great inventions, were invented by a fluke. Satoshi Nakamoto, the mysterious inventor of Bitcoin never wanted to create a currency.
Back in 2009, Satoshi said on Sourceforge that he had created, what many had failed to in the past- a peer-to-peer electronic cash system.
In the past, all attempts to create a digital currency failed because they were all, centralized. And the most significant accomplishment Satoshi and his Bitcoin wallet developers achieve, was that it was completely decentralized.
Now when we say decentralized, we mean that no central entity(Central Bank, Government or basically any third party other than the payer and the receiver) is regulating it.
So how does this work?
The biggest obstacle any digital cash system faces, being decentralized, is that of Double Spending. Double spending is nothing but the process of paying the same amount of money twice. Or simply put- same digital token is spent more than once.
So needless to say that digital cash systems, are in fact very vulnerable to Double Spending. It is so because tokens are nothing but digital files which can very easily be forged and tampered with. Satoshi overcame this obstacle with a simple solution.
Now, the key feature of cryptocurrency, as I’ve mentioned already, is that it has no third party running it; it is just a jumble of various ends of a network called peers. So it falls upon these peers, or nodes, to conduct a validation check of each transaction which is made on the network.
Now, to understand how this works, first, you need to understand one single, rudimental fact about cryptocurrency, that it has no physical form but is strictly digital.
There is no gold value of it, there is nothing tangible behind it, or it can turn into. It only exists in a database called, in Bitcoin’s case, Blockchain.
Before talking about Blockchain, you need to understand what Transactions are, in case of cryptocurrency. Every Transaction contains one single message in it, that is- “A gives X bitcoins to B.” so basically it is a contract between to parties involved in the transaction.
The transaction is signed by A’s private key, stored in a public ledger of all the transactions made on the network called Blockchain and then broadcasted over the network so that every peer in the network has a copy of this Blockchain. Thus, every time a transaction is made between peers, it is logged in this database and in all its instances over the network immediately, once it is confirmed that is.
After learning what cryptocurrencies are and how they are looked over, one question still remains- is this safe? The answer is yes. But how? “How” is where confirmation part of cryptocurrency comes in.
Every transaction, before it is noted in the Blockchain, needs to get approval from people called Miners. Miners are certain peers in the cryptocurrency network who take the vulnerable, pending transactions and stamp them as valid and then pass them to the Blockchain. For every transaction these Miners confirm, they are provided with a token of the cryptocurrency.
Miners are the only weak spot in the network; it is not hard for a hacker to create a bunch of nodes and make some fake transactions, valid. This will very quickly bring the entire system down. To prevent such a hack from happening Satoshi came up with a genius idea.
Whenever a Miner tries to validate a transaction, he is asked to solve a complicated puzzle. The puzzle asks the Miners to provide the system with a hash- a cryptographic function, which will link this block(every transaction is called a Block in a Blockchain) to its predecessors in the chain. The process is called Proof-of-work and is based on SHA 256 Hash algorithm in case of Bitcoin.
This aspect of cryptocurrency- that it is secured by strong Cryptography is the reason why it is so popular.
Though Bitcoin is still the most popular and valuable cryptocurrency in the market, over the past decade of its existence, various other cryptocurrencies have joined the market.
Every year, some of the greatest names in various industries hire app developers to help them device their own cryptocurrency. The newest in the race is R&B sensation Akon, who is developing a cryptocurrency called ‘Akoin’.
As of now though, the market is dominated by the following currencies:
Irreversible: it is a one-way street. Once you have sent money, no one can bring it back to you. No one.
Permissionless: there is no authority keeping you from using it. These cryptocurrencies are nothing but apps which you can download for free and thus cannot be controlled by an external entity.
Speedy and International: Transactions occur instantly and are confirmed within minutes. And since cryptocurrencies operate on global computers, it is everywhere on the planet!
Secure: cryptocurrency funds are locked in a public key cryptography system. Only people with a Private key can make cryptocurrency transactions. So basically, this scheme is impenetrable, and your funds are safer here than they would be in the tower of London.
Real world Anonymity: cryptocurrencies appoint addresses rather than using the physical identity of a user. Though the flow of cash can be traced using these addresses, it is virtually impossible to link a real person to these addresses.
The curse of the popularity of a new idea in the market is that it quickly leads to overpopulation. Every year new cryptocurrencies come making many promises and every year, many of them disappear.
And it is understandable if you are skeptical and wary of them at first. The markets are ruthless; early buyers are swimming in digital worth, while investors are frequently losing money; prices rise and plummet for reasons no one can understand.
To try and predict the next turn of cryptocurrency market is like trying to put a harness on a mad stallion, I kid you not!
But for all its unpredictability and unexpected rise and fall in the charts, none can alter the fact that cryptocurrencies are here and they are here to stay. With digitization coming to every aspect of human civilization, is it really that hard to picture a world where the global economy is digital as well?
Cryptocurrencies howl a sharp battle cry against the bureaucracy of governments and central banks over people’s money. They can’t track it, they can’t control it, and they can’t undo it.
So basically, cryptocurrency takes power to regulate currency and affect the inflation of an economy by exploiting monetary supply, back from the governments.
Someday governments of the world will have to realize that they can not fight this change, that in the end, like the rest of us, they will have to embrace the idea of digital currency and make their policies accordingly.
Because maybe not today, maybe not tomorrow, maybe not in a year, but a few decades from now, cryptocurrencies will become our reality. It’s the law of natural selection; none can fight it so we might as well just get on board with it.