What is a Cryptocurrency?
Cryptocurrencies have become globally recognised around the world. However, many people are yet to understand the whole phenomenon. Below are some explanations aimed at illustrating what this is all about
- A cryptocurrency is a digital or virtual currency designed to work as a medium of exchange and is a tradable asset.
- It uses cryptography to secure and verify transactions
- Cryptocurrencies generate a database of transactions which once verified conclude the transaction.
- Cryptocurrencies can measure anything that can be connected digitally, so can be used to track and monitor products and services
- Cryptocurrencies can be used to exchange data, therefore can be used in creating software applications.
Efforts to create a digital currency began in the 90s when the world was witnessing a tech blast. Some systems which attempted to enter the market include; DigiCash, Beenz, and Flooz. These did not flourish though due to various reasons which included; financial constraints, fraud and disagreement between bosses and their staff.
These systems adopted a TTP (Trusted Third Party Approach) which meant that organizations behind them promoted and validated the transactions. After these companies failed, developing a digital cash system seemed unachievable. It was not until early 2009 when Bitcoin was introduced in the market by an unknown faction of programmers or individual programmers also known as Satoshi Nakamoto.
They defined it as a ‘peer-to-peer electronic cash system.’ Bitcoin is distributable which means that it does not involve an intermediate regulating power. The idea behind Bitcoin is similar to peer to peer system for file distribution.
Any effective payment network should be capable of providing a solution to double spending. Before, this problem was solved by a centralized server that kept transaction and balance records, and a TTP (Trusted Third Party). However, this involved having your funds under the control of a regulatory body who had access to your personal data.
In Bitcoin however, every individual should undertake their responsibilities individually through the Blockchain (a communal record book where all the transactions carried across the network are kept and can be accessed by the public). This means that every person within the network can view all account balances. Every transaction is a folder which contains both the recipient’s and the sender’s wallet addresses or public keys, and the total coins moved.
The sender should use their private key to sign the transaction off. This process can be defined as elemental cryptography. Later, the transaction is advertised within the network even though it still requires confirmation first. In order to approve transactions, miners need to solve a cryptographic puzzle. This they do by selecting transactions, recording them as authentic and broadcasting them within the network.
Later, the network adds these transactions across its database. After confirmation of the transaction, it can neither be reversed nor forged. A miner will then earn transaction pay and a reward. Every cryptocurrency network is founded upon the participant’s consent in regard to the validity of transactions and balances. In the event the network nodes do not agree with a specific balance, the system is bound to break. Still, there are numerous programmed and pre developed rules within the network which ensure that this never happens.
The name cryptocurrency emanates from the fact that the consent keeping procedure is guaranteed with a robust cryptography which together with the other factors mentioned herewith renders blind trust and third parties unnecessary.