You might have heard the terms: cryptocurrency, crypto, crypto slots, or blockchain while talking with your friends, in the news, or in the article on the Internet, but do you know what this all really means?
After this article, you will understand the basics of blockchain, and how cryptocurrencies are working!
What is cryptocurrency?
Cryptocurrencies are digital currencies that are not issued by the central bank, but by a decentralized system that depends on blockchain technology. As we know, the blockchain is a distributed ledger in which transactions made in this network are recorded in blocks, which are linked and secured with cryptography. Therefore, blockchains technology can be used for many purposes, including cryptocurrencies. The most popular applications that use the blockchain are Bitcoin, Ethereum, and Dash.
To get an idea of how cryptocurrencies work, let’s take the example of Bitcoin. Several people use a computer to run a software called “mining client”. This software will connect to the Bitcoin network, and it will be part of the network, verifying each transaction and solving math problems to get new bitcoins as a reward. Every 10 minutes, the bitcoin miners will receive some amount of bitcoins as a reward for verifying the transactions.
With this said, we can say that cryptocurrencies are digital currencies that are not issued by the central bank, but by a decentralized system that depends on blockchain technology.
What is blockchain?
To understand blockchain, first, we must understand how banks work. A bank is responsible for transferring money between accounts. To do this, they have to keep track of all their transactions, from the beginning to the end. For this reason, they use a centralized database that they call a “ledger”.
Every transaction will be recorded in it and every person who has access to this database will be able to check if everything is right. Banks also have a “central server” (called mainframe) that keeps track of all the accounts and the ledgers. They use this centralized system because they want to control the information and all the transactions made by their clients. They need it because they are responsible for their clients’ money, so they have to be sure that all the transactions are made correctly.
The blockchain is similar to this centralized system in some ways. It is a decentralized database that allows people to keep track of their transactions without having to trust anyone.
The system runs on a peer-to-peer network, which means that each participant in this network has equal power to verify transactions, and there is no single point of failure. In this case, instead of using a bank or another authority to keep track of all transactions and ledgers, the blockchain uses cryptographic proof instead.
The system works in such a way that you don’t need to trust anyone or anything because you can see for yourself if everything is alright with your transactions or ledgers.
How does Blockchain work?
When someone wants to make a transaction using cryptocurrency, they will create a message that contains a hash of a previous block (the previous transaction), and some other data like identity and the amount of cryptocurrency they want to send or receive. This message will be added to the current block (the last transaction) and then it will be linked with the previous block using cryptography to protect against fraudsters trying to change previous transactions or create new ones.
The last block added to the chain will represent the current state of all transactions made in the network and it will be verified by all participants in this network. After that, every node will have a copy of all information stored in the blockchain. This means that every participant can keep track of every transaction made in this network, even when they don’t trust each other or when they don’t have any kind of relationship with each other.
To sum up, blockchain is a technology that allows you to transfer money safely without having to trust anyone or any organization for verifying your transactions and ledgers.