Cryptocurrencies have grown into a global phenomena that most people are aware of but few understand. By 2020, it will be difficult to find a big bank, software company, or government that hasn’t looked into crypto currencies or begun a blockchain project. Beyond the hype in the press releases, many people struggle to grasp the fundamental concepts. So let’s have a look at the entire story.
So, what exactly are crypto currencies? Bitcoin was created by Satoshi Nakamoto in 2008 as a peer-to-peer electronic cash system. A payment network with account balances and transactions is required to create digital cash. However, one key issue that every payment network must address is the prevention of double spending, or when one entity spends the same money twice. In a decentralised network, this is usually done by a central server that maintains track of all the balances.
Because you don’t have these servers, you’ll have to rely on every single network entity to complete this task. Every peer in the network must have a complete list of all transactions to compare to all future valid transactions or an effort to double spend. But how can these entities maintain agreement on these records if the network’s peers disagree on a single minor balance? Nobody understood how to do it until Satoshi showed it could be done, and cryptocurrencies are an important part of the solution.
We’ll use the network’s transactions to demonstrate this. The transaction is a file that indicates John gives Jane X Bitcoin and is digitally assigned by John. The transaction is published to the network once it has been signed, and it is sent from one peer to every other peer. This is a common peer-to-peer technology. The transaction is confirmed when a certain period of time has passed, and only miners can confirm these transactions. They perform these functions in a cryptocurrency network by accepting transactions, stamping them as genuine, and disseminating them throughout the network.
After a miner confirms a transaction, every node must add it to its database and upload it to the blockchain. Miners are paid in cryptocurrency, such as bitcoins, for their efforts, and anybody can become a miner. To qualify for the work, they simply need to employ some of their computer’s processing power. After identifying a solution, each miner competes to solve a cryptographic challenge. As an incentive, a miner can confirm the transaction and add it to the blockchain. They are then paid by the network in the form of a cryptocurrency for doing so.
This network of independent players is financially motivated to maintain the transaction history’s authenticity. The gist of cryptocurrencies is that they are the key to solving the complicated challenge of digital cash. Satoshi had figured it out and was able to preserve integrity and consensus over a wide range of independent and potentially malevolent parties. Cryptocurrencies are effectively a monetary reward for everyone willing to help maintain the network safe.