Nowadays, there is one topic that has become a huge talking point on the internet and that is the Cryptocurrency boom. Not only on the internet, but it has also made its way into the financial columns and magazines, where the majority of the sections lately are occupied by cryptocurrency talks by experts. In fact, it's the most talked-about subject amongst the Millenials, where many forms of cryptocurrency such as Bitcoin, Ethereum, and Cardano are widely bought and discussed. So what exactly is this cryptocurrency and how does it work. Along with its operation. what benefit does it provide for users as compared to other currencies?
Decentralized mode of operation.
Cryptocurrency is defined as a digital form of currency with encryption, used to make transactions such as transfer or release of funds, Exchange of goods or services, etc. These transactions are powered by a technology called Blockchain. It is a peer-to-peer network. where transactions take place without any regulation of any central authority. In other words, it is a digital currency in form of coins or tokens which are distributed in a decentralized manner.
- When compared to other currencies, Cryptocurrency transactions are not controlled by central authorities such as banks. So usually when two individuals are part of a normal transaction, let's say the online transfer of money, for a local transaction it usually takes a few minutes for the money to be transferred to the other person. Here the banks are the intermediaries who verify the transaction by making a note of it and approving it based on the authenticity of the transaction.
- Sometimes, there are issues where a monetary transaction such as transfer or payment of money is canceled or is taking more time than usual. This happens when there is a server issue at the banks due to which transactions get stuck.
- Cryptocurrency transactions don't have to contend with such issues because of its absence of a central authority and transactions occur on a peer-to-peer basis in an open platform which leads to faster and uninterrupted transfer in a matter of a few seconds.
The success of Bitcoin and Ethereum have added to the hype of Cryptocurrency.
The two most popular Cryptocurrencies currently in the market are Ethereum and Bitcoin. Bitcoin was invented in 2009 by Satoshi Nakamoto, whose whereabouts are still unknown to this day. Ethereum was co-founded by Vitalik Buterin in 2014. Both Cryptocurrencies have been hugely popular due to their high-market capitalizations and the volume of purchase.
- Both are decentralized tokens used in blockchain technology. The purpose of bitcoin is to use it for transactions such as purchases, Exchange of goods & transfer to other Crypto wallets. Ethereum is a decentralized software used to create smart contracts and applications on its network without the meddling of third parties and fraud.
- The use of Ether is for two purposes- Traded as a digital currency in many exchanges & also deployed in the Ethreum network to run applications. The software is also used to make payments all over the world.
- Bitcoin was created with intention of being the first digital currency that isn't controlled by a central authority. They are not physical coins but are stored in a cryptographic digital ledger that keeps a track of the transactions through its open network. In an article in Investopedia, the purpose of both these cryptocurrencies is explained in greater detail.
- The difference between both these cryptocurrencies is that Ethereum transactions are quicker than bitcoin especially international transactions which are completed in 20 minutes. International transfer of bitcoins takes more time as compared to Ethereum. In Ether, the smart contacts can not only be used to purchases goods but also to buy real estate and others. Companies such as Barclays are also making use of smart contracts to purchase derivatives through the Ether network.
The Blockchain enables Highly Secure and Transparent transactions
- Cryptocurrency transactions are recorded in the blockchain in the form of blocks. When one person transfers 4 tokens or coins to another individual's wallet. after the completion of the transfer, the transaction details are stored in the form of blocks in the blockchain.
- A blockchain is a digital ledger that comprises the transaction details of all crypto users in the world. A similar analogy to ''an Email being a function which is powered by the internet''.
- These blocks are created by Miners. Miners have to solve a complex mathematical problem in order to create blocks for which they are rewarded with bitcoins. here the transaction is verified and then blocks are created after completion of a transaction.
- Apart from this, Cryptocurrency transactions are transparent and extremely difficult to alter. The users of blockchain technology are aware and informed of every transaction that takes place all around the world, but the identity of the users remain anonymous.
- For example, a transfer of 2 bitcoins from India was made to an individual from south africa. The details of the transaction such as the number of bitcoins and the country to which it was transferred. will be available on the platform without revealing the identity of the parties involved in the transaction.
- Details of every user's balance of bitcoins in their crypto wallets are also evident, which leaves no room for illegal transfer of coins as every user is aware of how much bitcoin each user holds in his or her wallet.
- To complete a Bitcoin transaction, a hashing algorithm "AHA256'' is used to process the transaction and encrypt it along with the sender's public key( His bitcoin address and private key(Digital signature or password of the sender) to move the transaction ahead. Here the sender has to use his signature with the help of a private key and mention the number of bitcoins, the previous source of bitcoin transaction & the recipient's address to complete the transaction.
- The transactions are immutable and extremely difficult to hack. As blocks in the blockchain are connected with each other, if a hacker wants to alter a single transaction he will have to alter the other set of blocks as well, which is extremely difficult due to the complex algorithm and encryption attached to the blockchain. This adds to the differentiation of crypto as compared to other currencies.
These are some of the features which make cryptocurrency the next big thing. Even though it hasn't been recognized as a universal currency by the governments of many countries, countries such as Japan allow bitcoin transactions, where locals use bitcoins to order foods in restaurants, Its decentralized nature might refrain governments from adopting crypto but like other countries that have started using it, it's just a matter of time until all the other nations buy into this hype around cryptocurrencies.
Sources- Investopedia, Bitcoin.com, Cnbc
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.