cryptocurrencies and how they work
I have been fascinated by cryptocurrencies for a while now. It is an understatement to say they have a mixed reputation. Opinions about them range from unending praise to scorn. Some say they will usher in a new age overturning old economics. Others believe they are a Ponzi scheme only used by drug dealers that will destabilize national economies. I look at them as a fascinating space that could potentially change how people interact and relate with each other in the marketplace.
Whatever you think about them, I’d like to give you a brief introduction to this new trend and the technology that underlies it the blockchain. The mathematics that fuels blockchain technologies and, therefore, cryptocurrencies are exceptionally complex. However, the basic idea and mechanisms behind cryptocurrencies are simpler to explain.
Decentralization and Trust
First, the basic ideas behind cryptocurrency are decentralization and trust. The goal of cryptocurrency is to decentralize the creation and transactions of digital money; while maintaining both verification and assurance. In contrast, with fiat currency, a centralized institution, namely a central bank, controls its issuance. Cryptocurrencies achieve both decentralization and trust through the blockchain.
The blockchain is a public available distributed ledger technology that creates trust among all participants without the need for a central authority. In simpler terms, the blockchain is a chain of blocks or, more precisely, records. Each record records a transaction that m through a mathematical cryptography function before being added to the blockchain. Each block is chained together in a sequence, starting from the very first transaction to the latest.
The system uses cryptography to make each transaction secure and anonymous; while verifying for all participants that the accuracy of those transactions can be trusted. How does it do this? The earliest system used for ledger verification was a timestamping scheme known as proof of work. Proof of work uses hashing algorithms along with mining to validate transactions.