In Layman’s terms, cryptocurrency is a decentralized digital currency, where the transfer between the peers occurs in an encrypted public ledger. In our previous article, we have already discussed what is cryptocurrency. In this article, we will take a closer look a how does cryptocurrency actually work.
Before you learn about how cryptocurrency works, you should have a clear understanding of what exactly is Blockchain. Basically, Blockchain is a kind of database that is responsible for storing all the transactions. In the case of blockchain, it is spread across multiple servers, in hundreds of computers. This decentralized nature of blockchain ensures that no single governing body is responsible for controlling the transactions. That being said, you can know more about Blockchain Technology here.
Working of Cryptocurrency Simplified
Just like your bank credit or debit cards, cryptocurrencies work in a similar manner. For both instances, a complex system is implemented for keeping track of all the currency transactions. Even the balances shown are electronic. As for the customer, they are only able to send and receive money without being directly involved in the complexity. The same is applicable to cryptocurrency as well. The only difference between the two being, banks and other governing bodies keep track of the ledger while issuing the currency. While cryptocurrency is handled using an algorithm.
How Cryptocurrency Works? (With Example of Bitcoin)
Every transaction that occurs between two peers uses a particular software known as ‘cryptocurrency wallet.’ In order to make the transaction, the peer needs to use the crypto wallet. This is where the balance transfers from one public address to another. Every cryptocurrency wallet is associated with a private key. Only knowing the password enables the user to initiate the transaction.
Once the transaction is made, it is encrypted and queued before it can be added to the public ledger. This is where the transactions are recorded within the public ledger using mining. If you are unaware, we have explained Cryptocurrency mining below. Every user with cryptocurrency has access to the public ledger. All you need to do is download and run the software. It is also commonly known as a ’full-node wallet.’
One of the best things about cryptocurrency is that, although the transactions are made public, those who initiated the transaction are still encrypted. Mostly, they are kept pseudo-anonymous. But, each transaction can lead to its unique set of keys. In other words, whoever knows the keys are in possession of cryptocurrency.
Similar to bank account holders, who are always in possession of the money. Since there are several transactions occurring at the same time, miners assist to add them sequentially. This is also primarily one of the reasons, why the ledger and the transaction behind it are known as ‘Blocks’ in the first place.
Now, bear in mind, this is how Bitcoin and the majority of the cryptocurrencies work. But there are also altcoins that use alternative mechanics. There are also cryptocurrencies that offer completely private transactions. You might even know some that work without using blockchain as well.
What Exactly is Cryptocurrency Mining?
Well, you might be intrigued by the idea of cryptocurrency mining. Our article on Bitcoin Mining can point you in the right direction if you want to go in-depth with mining. Basically, cryptocurrency miners run specifically designed software and hardware to confirm transactions within the digital ledger. Solving these puzzles, and verifying the transactions helps them to acquire the named cryptocurrency as a reward.
What are the Most Common Ways to Acquire Cryptocurrency?
Cryptocurrencies like any other currency can be obtained in exchange for any service or commodity. For example, you can trade currency with crypto, or even exchange one cryptocurrency for another. Trading is yet another aspect you can look for, which is especially the choice for brokers and exchanges. Yes, cryptocurrency can be treated just like stocks in exchanges.
Trade for cryptocurrency can also be done between two peers as well. Sometimes third parties are also involved in such peer-to-peer exchange. Due to the fluctuation in the price of cryptocurrencies, sometimes even investing in them can be subjected to volatility. So, make sure to consult with your financial advisor before investing.
The Bottom Line
So, that was our curated article on how exactly cryptocurrency works. While the technology behind cryptocurrency might seem complicated, it still offers one of the most secure transactions. And the idea of a decentralized ledger ensures that there is no single governing body to dictate the transactions. So, let us know your thoughts in the comment section below.
Do you believe cryptocurrencies have a bright future ahead?
How Does Cryptocurrency Work?
First of all, the transaction is initiated from one crypto wallet to another. Then, the transaction is encrypted and queued before it can be added to the public ledger. The process leverages mining to record the transaction in the public ledger. The best thing about cryptocurrency is even though all the transactions are public, no one knows who initiated it and where the money is going. This is how Bitcoin and most of the other cryptocurrencies work.