Cryptocurrency | What is it? How does it work?

What is a Cryptocurrency?

Cryptocurrency is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.

Let us view what cryptocurrency actually is, by understanding the differences between a normal currency and cryptocurrency:

A currency (fiat) has a physical base, paper money; whereas cryptocurrency does not have one, it is digital (non-physical).
A typical currency is controlled by a central authority like the government. Cryptocurrency is decentralized; it is not controlled by any specific entity.
Currency is stored in physical spaces like banks (bank vaults), whereas cryptocurrencies are stored in digital spaces called ‘wallets.’
The value of a typical currency is decided by the entity controlling it which all of its users have to accept, while the value of cryptocurrency is decided by its users.
Cryptocurrency is secured by ‘cryptography’ (codes and algorithms), instead of fiat currency which is secured by ‘vaults’ and physical security systems.
Records of a typical currency are stored in a central database, whereas cryptocurrency records are stored in a database existing in form of a computerized distributed ledger.
(I.e. currency records are in centralized databases and cryptocurrency records are in decentralized and distributed databases).

So, is cryptocurrency a typical digital currency?

Yes and no.
Yes, it is digital because there is no physical base to it, and its transactions can be done without having to fill in forms, and without much time delays. No, because it is not like the centralized digital currency which uses central banking systems as the control unit.

Cryptocurrency is a decentralized digital currency; meaning, there exists no government, no authority that controls its flow. Users are free to deal with cryptocurrencies anywhere, anytime.

How does cryptocurrency work?

(If not through banking systems, then how does cryptocurrency interacts and proves security?)
When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, also known as a blockchain that serves as a public financial transaction database.

In simple terms, cryptocurrencies work using a technology called 'blockchain.'

Blockchain is a decentralized technology spread across many computers that manage and record transactions. It is secured by cryptography (codes and algorithms) and is used as a medium of exchange within a peer-to-peer (P2P) digital economic system. The use of cryptographic (coded) techniques is what ensures that these systems are completely immune to fraud and counterfeiting.

Generally speaking, every cryptocurrency works on top of a blockchain, and a blockchain works according to a predefined set of rules (i.e. an underlying protocol). The protocol is what defines how the blockchain and the cryptocurrency system should operate.

Cryptocurrencies have huge potentials within them:

Cryptocurrency can be seen as the currency of the future which is going to increase immensely in value.
Cryptocurrency removes central banks from managing the money supply, which is a plus since over time these banks tend to reduce the value of money via inflation.
The technology behind cryptocurrencies, the blockchain, it’s a decentralized processing and recording system and can be more secure than traditional payment systems.

A cryptocurrency is a system that meets these conditions:

The system does not require a central authority; its state is maintained through a distributed consensus (agreement) or simply blockchain.
The system keeps an overview of cryptocurrency units and their ownership. (Cryptocurrency units = volume of cryptocurrency available with a person or the whole market).
The system defines whether new cryptocurrency units can be created, and the circumstances of their origin, and how to determine the ownership of these new units.
Ownership of cryptocurrency can be proved exclusively cryptographically.
The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
(i.e. a personA owning 2 TRX can make a transaction to personB, and the personB receiving the 2 TRX will now own that cryptocurrency, to put it simply, ownership of 2 TRX is transferred from personA to personB after the original/current owner of the crypto – personA made a transaction).

Note: When you make a transaction or transfer your crypto to someone, you basically give the ownership of your crypto to the receiver.

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