{"id":7887,"date":"2021-12-05T08:10:44","date_gmt":"2021-12-05T08:10:44","guid":{"rendered":"https:\/\/www.softwaretools.tech\/?p=7887"},"modified":"2021-12-05T08:10:48","modified_gmt":"2021-12-05T08:10:48","slug":"what-is-cryptocurrency-and-how-does-it-work","status":"publish","type":"post","link":"https:\/\/www.softwaretools.tech\/what-is-cryptocurrency-and-how-does-it-work\/","title":{"rendered":"What is Cryptocurrency and How Does it Work?"},"content":{"rendered":"\n

In recent years we use many types of methods to pay for goods and services that we require like using money, cryptocurrency, etc.<\/p>\n\n\n\n

But before money existed, people used different methods to trade for goods and services like the Bartering system. Bartering is a process of trading goods and services with other goods and services instead of money.<\/p>\n\n\n\n

Although the Bartering system started by the Mesopotamians back in 6000 B.C. had its advantages, where we could trade services for goods, it was not always a feasible option.<\/p>\n\n\n\n

For example, if you would like to trade your horse for a bag of rice, the other trading party may not accept the deal as the trader may not want a horse but something else that is useful for them, and thus both parties may come to disagreements.<\/p>\n\n\n\n

This led to the development of a monetary system in which goods and services could be traded using items that are referred to as money like printed paper money or coins.<\/p>\n\n\n\n

Unlike Bartering, a system where goods of equal worth were exchanged in a monetary system, the items referred to as \u201cmoney\u201d often have little or no value in respect to the item itself. For example, the paper used to print money has no particular value.<\/p>\n\n\n\n

Money has value because it is a chosen exchange medium by the people. When everyone deems that a bill or a coin has a value, then it can be used as a form of payment to exchange goods and services.<\/p>\n\n\n\n

But, people won\u2019t recognize just any piece of printed paper as money if they aren\u2019t authorized by banks or governmental organizations. The reason is simply that people trust banks or governmental organizations to hold their money.<\/p>\n\n\n\n

\"dollar-currency\"<\/figure><\/div>\n\n\n\n

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If you look closely at a printed banknote, you will be able to find that the authorized governmental organization promises the bearer of that note the amount of money mentioned on the note thus deepening the trust between the two parties.<\/p>\n\n\n\n

Currently, in the 21st century, the advancements in our technology have given rise to more novel forms of currencies: mobile payments and virtual currencies.<\/p>\n\n\n\n

Mobile payments are payments made through a specific application for goods or services through a portable electronic device like your mobile phone, tablets, etc.<\/p>\n\n\n\n

Virtual currencies are online currencies that have no physical appearance but can be used just like money to buy goods and services online.<\/p>\n\n\n\n

Now, let\u2019s understand more about these virtual currencies otherwise known as cryptocurrencies.<\/p>\n\n\n\n

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What is Cryptocurrency?<\/h2>\n\n\n\n

Cryptocurrencies are digital currencies that can be mainly used for online transactions to buy goods and services. As the name suggests, \u201ccrypto-currency\u201d is a form of digital currency that uses online ledgers with strong cryptography to make online transactions secure.<\/p>\n\n\n\n

Many companies have issued their currencies which are also called tokens. We can use these cryptocurrencies to exchange tokens and buy goods and services from the company.<\/p>\n\n\n\n

Cryptocurrencies are completely virtual where the record of your money balance and expenditures are stored in a spreadsheet. It uses a technology called blockchain to operate.<\/p>\n\n\n\n

Blockchain is a public digital ledger of transactions that stores information on each transaction in a block and is linked with other blocks to form a chain. This information is stored in multiple computers thus making it difficult to be tampered with.<\/p>\n\n\n\n

\"cryptocurrencies\"<\/figure><\/div>\n\n\n\n
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How do cryptocurrencies work? <\/h2>\n\n\n\n

Cryptocurrency like Bitcoin uses blockchain mining to operate. It is a currency that has no physical appearance and only its balances are kept on a digital ledger that everyone has transparent access to.<\/p>\n\n\n\n

All virtual currencies are verified using a massive amount of computer power. Blockchain mining is done by a collection of computers.<\/p>\n\n\n\n

Each computer is referred to as a \u201cnode<\/strong>\u201d or \u201cminer<\/strong>\u201d. It runs a mathematical code and stores the blockchain. Blockchain as mentioned earlier is a collection of blocks stored with information.<\/p>\n\n\n\n

All miners or nodes have the same list of blockchain and it keeps getting updated in real-time when a new transaction is done.<\/p>\n\n\n\n

But, because all miners have a blockchain with the same list and can see new blocks getting added transparently, it is quite difficult to conduct fraud using virtual currencies. Essentially, no one can cheat the cryptocurrency system.<\/p>\n\n\n\n

Key features of cryptocurrency<\/h3>\n\n\n\n

Cryptocurrencies use advanced cryptography which is primarily based on mathematical theories. It uses cryptography that helps to generate cryptographic puzzles that enable data mining.<\/p>\n\n\n\n

There are two main elements of cryptography that is applied to the procedures while trading using cryptocurrency and they are:<\/p>\n\n\n\n

  1. Hashing<\/strong>: This procedure verifies data and maintains the structure of the blockchain. It encodes people\u2019s account details and transactions. This enables users to transact using bitcoins anonymously.<\/li><\/ol>\n\n\n\n
    1. Digital signatures<\/strong>: This helps cryptocurrency users to own their encrypted information and helps them to transact without revealing their information. This is also used to sign monetary transactions made for online trades.<\/li><\/ol>\n\n\n\n
      \"crypto-trading\"<\/figure><\/div>\n\n\n\n
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      What makes cryptocurrencies so popular?<\/h2>\n\n\n\n

      The below-given points are some of the reasons why cryptocurrencies are popular among their investors:<\/p>\n\n\n\n