So what is Cryptocurrency? Well, according to Wikipedia, it is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets. So it is more than just money.
According to a guy called Jan Lansky, Cryptocurrency is a system which meets the following six conditions:
- The system does not require a central authority, distributed achieve consensus on its state.
- The system keeps an overview of cryptocurrency units and their ownership.
- The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
- Ownership of cryptocurrency units can be proved exclusively cryptographically.
- The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current owners of these units.
- If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.
How does it work?
Let us consider Bitcoin, as it is the most famous Cryptocurrency.
As a new user, you can get started with Bitcoin without understanding the technical details. You’ve to install a Bitcoin wallet on your computer or mobile phone (Just like Paytm or Bhim), and it will generate your first Bitcoin address (Like your Phone no. , except that Phone number is not created here) and you can create more whenever you need one. You can disclose your addresses to your friends so that they can pay you or vice versa. In fact, this is pretty similar to how email works, except that Bitcoin addresses, should be used only once.
Where are the information about the transactions and the balances stored? It is stored in something called ‘Blockchain’(Shown left). Blockchains are records of all the transactions which can be viewed by the public but cannot be altered individually as they are encrypted and connected to the previous block. So modifying them would require us to modify the whole chain which is almost impossible. This was invented by a man named Satoshi Nakamoto, especially for Bitcoin.
Why use Cryptocurrency?
So, the Big question, running through all the minds reading this blog, why use it when we have normal currency? Well, Cryptocurrency is made for some purpose and let’s see what are the advantages of using it:
1. Low-cost money transfers
The most well-known benefit of cryptocurrencies is their ability to send and receive payments at a low cost and at a high speed. For example, a recent $99 million litecoin (LTC) transaction took only two and a half minutes to process and cost the sender only $0.40 in transaction fees. If this money transfer had gone through a financial intermediary the fees would have been much, much higher and the transfer would have taken several days, or longer if this was a cross-border transaction.
2. A censorship-resistant alternative store of wealth
While you probably don’t think your bank account and assets could be frozen, the reality is that this occurs more often than people realize — especially in jurisdictions with dubious rule of law. This is where one of the most unique and powerful uses of crypto comes into play. Cryptocurrencies, such as bitcoin, act as a censorship-resistant alternative store of wealth that only the individual with the private keys to the wallet has access to. Hence, no personal bitcoin wallet can ever be frozen by the authorities.
3. Make private transactions
Privacy-centric digital currencies such as Monero (XMR), Zcash (ZEC), and PIVX (PIVX) enable users to make anonymous financial transactions. That means individuals can make money transfers without having to explain to a bank why they are sending a large sum of money, what the sources of the funds are and who they are sending it to, which can delay the transaction and involve unnecessarily bureaucratic processes.
These are just some advantages of using Cryptocurrency. There are downsides too, but I won’t discuss them now. Cryptocurrency might seem weird for now, but it is the result of the ever-growing science and technology so don’t be surprised if weirder stuff comes out in the future.