In this article of QuantVan Academy we want to talk about ” How does cryptocurrency work?”. according to our previous articles on what crypto and crypto trading are, we understood that cryptocurrencies are a form of digital money that functions on a whole new monetary system. which is decentralize and peer-to-peer.
Now it is time to dig a little deeper and look closer to the operation of cryptocurrency.
such a network shall be foolproof in order to work efficiently. with every transaction done in a transparent and verifiable manner.
This network is basically calling the blockchain. and at the center of the blockchain technology, lies the distributed ledger.
Distributed ledger is a database that enables any participant of a larger network.
the aim is to update it independently unlike the ledgers that were under the control of a single authority.
You will need a cryptocurrency wallet which is like a normal wallet. but digital and encrypte, to transact on the distributed ledger.
A wallet of cryptocurrency work in a way that gives you two keys, a public key and a private key. as your digital identity on the platform. The public key is how you are identifying by others on the platform.
what you can share with anyone who needs to send you cryptocurrency funds. the private key is the only key requires to perform transactions on the distributed ledger.
Cryptocurrencies labeled as pseudonymous in public and private keys. A distributed ledger is available for everyone to see all transactions which perform. . Since the distributed ledger is an open source, you are not entirely anonymous, but rather pseudonymous.
because your transaction flow though available for everyone, does not easily determine your personal identity. Distributed ledgers based on a consensus between transacting parties since any trust third party eliminates. the public ledger is updated when a consensus is reached.
To achieve the immutability of distributed ledgers, there has to be a verifying system.
that is where cryptocurrency mining does its job.
What is mining cryptocurrency? A collection of transactions arranged into a block. Blocks are usually heavily encrypte and turn into complex mathematical puzzles. Whoever solves the puzzle, gets to open the blockchain and the whole solving process calls mining. Miners get the rewarded with coins of the underlying blockchain network in competition between other miners .
if it is the Bitcoin blockchain, a miner will get rewarded in Bitcoins.
Mining controls the speed at which coins create and to prevent the threat of devaluation of underlying coins. the puzzles develope to get harder when more blocks built.
Transactions in the Network
Mining ensure the accuracy and fidelity of transactions. This introduces the Proof of Work system that validating work and proving that it is indeed correct. With Proof of cryptocurrency work, the puzzles are designed to be hard to solve but easily to verify or prove that it is correct. This system validates a cryptocurrency coin or gives it value. Despite the foolproof nature of it, it has some limitations as well. You will need hardware with huge computational power to increasingly solve harder puzzles and that is expensive.