Trade has been a part of human life since ancient times. Earlier, trade was known as the Barter system in which people used to exchange their goods and services in return for other goods or services. The trading system has seen a lot of evolution over time.
Nowadays, we have money to facilitate trade. Through centuries the system of trading has become quite complex and huge. Everyone trades with everyone worldwide. The current system of trading involves the presence of middlemen or financial institutions to facilitate trade. This present system is called the centralized system in which a body governs the flow of money.
We have banks that create money, circulate money, and maintain records. These records are kept private and are only known to the central authority. Every time the money is deposited in a bank or transferred to someone else, the financial institution is taking a piece of that money to store it securely, as a caretaking cost.
The concept of a central authority and hidden transaction records were a few issues that led to the creation of Digital currency, known as Cryptocurrency which provided people with a decentralized network for trade.
Introduction to Cryptocurrency
Cryptocurrency, a combination of cryptography and currency is a digital medium of exchange that uses encryption techniques to secure the processes that are involved in generating digital currency and conducting transactions. Once the trade is done and when the money has been exchanged, the transactions are publicly recorded.
Cryptocurrency is a digital currency, more like a code on a computer, that you can use to purchase anything just like usual money. There are special wallets to store this currency and you can use those wallets to buy more cryptocurrency or use what you have to buy anything. All the transactions that you do are stored in a public ledger.
Cryptocurrency is taking over the market with new cryptocurrencies emerging at a very high pace. Ethereum, Ripple, Bitcoin, and Litecoin are some examples of the digital currencies that are currently available in the market. Investors opt to purchase Bitcoin as it is the oldest and the most popular of them all.
January 2024 update: There are thousands of cryptocurrencies and tokens in the market right now. And every day new coins are being introduced.
To understand Cryptocurrencies better we must have a basic understanding of what cryptography means and how it works.
What is Cryptography?
Cryptography is a method of storing and transmitting data in a particular form so that only those, for whom it is intended, can read and process it.
Plain text is converted into a numerical value then it is encrypted with an encryption key, and then we get the ciphered text. The ciphered text is unreadable to anyone who doesn't have the decryption key. The decryption key provides us with the original data when fed with the ciphered text.
So that's the basic concept of cryptography.
What is Bitcoin?
Bitcoin is the first decentralized digital currency which emerged in the year 2009.
Bitcoin is a type of digital currency also known as internet money. Bitcoins enable a network of computers to maintain a collective ledger via the internet, of all the bitcoin transactions that take place globally and this ledger is open to the public. All the information is available in this digital ledger and is open for everyone, fully distributed across the network and we call this blockchain.
The main benefit of opting for this decentralized approach is that, if data gets corrupted on one system, other computers which are a part of this network, correct the data on the corrupted server.
What is Blockchain?
A blockchain is a distributed database that maintains a continuously growing list of ordered records called blocks. Each block contains a time stamp and a link to the previous block. In other words, Blockchain is a data structure that makes it possible to create a digital ledger of a transaction and share it among a distributed network of computers. By design, blockchain is inherently resistant to modification of the data. Once recorded, the data in a block cannot be altered retroactively. Why? Because a copy of the public ledger is maintained on all the devices connected to the blockchain.
So if you want to modify the ledger, you must have access to at least 50.1% of all the devices part of that blockchain. All the devices that are part of the blockchain are called Miners.
All the transactions that are recorded in this digital ledger are verified by a process known as Bitcoin mining.
What is Crypto Mining?
Mining is the process of adding transaction records to a blockchain's public ledger. When a new Token account is created account no. comes with a private key that's mathematically linked to that account number. For a transaction to be completed, a signature is needed.
But this signature is not the one we do. In this, the private key and transaction message are fed into a signature creator (a mathematical function) which creates a key i.e. signature. Another function checks whether the signature was created by the true person. Signatures are unique to each transaction.
After each transaction is completed, it is required to be recorded in the digital public ledger and this is where miners help. Miners help to verify each Crypto transaction/payment from one user to another on a decentralized network. Once the transaction is verified it gets recorded in the public ledger. And for lending the processing powers of their CPU for verifying the transactions, every computer node is rewarded with some cryptocurrency.
So it's like, if you have a good and powerful machine, capable enough to do the calculations for verifying any Cryptocurrency transaction, then you can become part of a blockchain. And for each successful verification, you get some reward in cryptocurrency. The blockchain gets public participation for keeping the blockchain's public ledger maintained, and the public involved gets cryptocurrency as a reward.
This article covers the basic idea of what a blockchain is, what cryptocurrencies are, what is mining, and how this whole network works.
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