How does cryptocurrency work

Prateek Tripathi
8 min readMay 29, 2021

Hello, readers; this is my first blog on this site, so welcome all of you. I hope you will like this article, and let me tell you that I have so many friends like 75% of my Friend list who invest or trade-in cryptocurrency don’t understand the phenomena of how does cryptocurrency work, there are no so many questions about the stock market compared to cryptocurrency because crypto was really so innovative I mean after reading this article you will see why the Cryptocurrency is so innovative and why this can be the future of currencies and then you will find out yourself Whether You should invest or not in Cryptocurrency.

Introduction

So There is a currency that’s worth thousands of US dollars, but you can’t touch it; you can’t experience it. It’s a digital currency, and it only exists electronically. It’s literally not connected to any authority and government, so it doesn’t have central issuing control.

So you can put it like it is a digital asset; it doesn’t have any physical thing. So just like we keep cash in a wallet, Cryptocurrency is also stored in digital wallets. It can be hardware-based or web-based; you can reside on a desktop or mobile device.

When I first got to know that digital asset stores electronically than I had a question like why can’t I just copy and create ultimate Bitcoins or any other cryptocurrency and become a wealthy person just by copy and paste ctrl+c, ctrl + v? And that’s all thing I will do in my entire life, but that’s not how these things work like it’s not just like you are copying a movie file and share it with your friends.

There is a catch like if bitcoin doesn’t have any organization’s authority, then how they are so secure and cannot be hacked __ so let’s jump into our new title.

Cryptocurrency

So you might have a Question inside you that how does any cryptocurrency have any kind of value? The first Cryptocurrency of this world, Bitcoin, Wouldn’t have existed Without two essential things first, a whole network of people, and second, cryptography.

Bitcoin is a digital currency So you can exchange Bitcoin between computers and worldwide peer to peer network, when a Group of computers has equal permission and responsibilities for processing data and group don’t have any computer for just sharing or receiving any kind of data like all just have same responsibilities, Their group called peer to peer network sharing __The main point is in peer to peer network sharing that they don’t have any computer for just doing something special they all have just same responsibility.

Basically, a peer-to-peer network is used for sharing, like allowing people to make copies of super legal movies and songs for Downloading.

So a Digital currency that uses peer-to-peer network sharing and worth thousands of dollars. So what’s stopping us from creating many copies of bitcoin and becoming wealthy like movies and songs. But unlike any other data, it cannot be copied. Bitcoin isn’t a string of data that can be duplicated. It’s kind of an entry on a Global system called the blockchain.

Blockchain

Basically, blockchain records every transaction that has ever happened in Bitcoin, so when you send a bitcoin to a person, you are not actually sharing many files. You are just making an entry on this ledger like

‘Prateek sends 0.00001 bitcoin to peter.’’

So Who controls and maintains Blockchain since cryptocurrency doesn’t have any service to prevent or record transactions like banks.

There is no official group of people who control or update the ledger, it’s decentralized, and the thing is, anybody can volunteer to keep the blockchain updated. In fact, many people do, and they are called ‘miners.’

If you are not so new to cryptocurrency, you probably have heard ‘bitcoin miners,’ and they make so much money from it too.

According to The Week, a bitcoin mining farm from northeast china produces 700 BTC per month. It’s one of the largest mining farms globally, and it takes so much energy, has so many computers, and operates in a vast space.

So like anyone can be a bitcoin miner, it works so well just because many people are a bitcoin miner, and they just keep track of the same thing like every bitcoin miner do the same thing to make sure all transactions are accurate.

Blockchain Transaction

In school, we had an absent notebook for a whole year. It has many pages for recording all student attendance data for an entire year, so when a page gets filled, they move to the next page. So you can think of every page as a Block of transaction.

A group of Blocks of transaction called a blockchain.

There is more than that in mining, like how all the bitcoin miners sync their data. You can think of this as a big class. This is because so many teachers record the same class attendance. Hence, if any student has a fever and any teacher wants to send that student home, they must announce every teacher to update their ledger. The significant benefit of doing this is that if someone records incorrect data, the principal can easily see other teachers’ notebooks and find what’s wrong.

So for every transaction, you are announcing these things to the whole bitcoin network.

1. Your account num

2. The account num of the person you want to send bitcoin to

3. How many bitcoin you want to send

Cryptography

So there is another problem: if all it takes to send a bitcoin to another person is like sending a message to the whole Bitcoin network, then there is a security problem if some people can send fake entries on the blockchain network. So they can hack someone’s bitcoin-like bank frauds.

So what’s stopping ‘Peter’ to pretend to be ‘prateek’ and sending all of Prateek’s bitcoin to him.

Bitcoin kept pretty safe because of cryptography. That’s the reason it’s called cryptocurrency.

Imagine you and your girlfriend share very secret information. For some reason, you two have to split up, so now you have to communicate with messages, and you don’t want anyone to read those messages, so you two decided to send messages in codes first you convert your message into some kind of code its also called encryption and when you girlfriend received it she convert your code to message from the rules you share before splitting up its also called decryption.

When you create an account on bitcoin network called a wallet, you might have heard that before

That wallet is linked with two keys

  • Private key
  • Public key

So, in this case, a private key can take data and mark it its also known as a sign it purpose of doing this to letting people verify that this data was actually sent by this wallet so when you send a message(which says ‘Prateek send 4 bitcoin to her girlfriend’)to bitcoin network everyone can see my public key and make sure this message is verified and then they can add that message on their blockchain.

Math Problems

To add any block of transaction to any ledger, miners have to solve a kind of math problem created by a cryptographic hash function.

A hash function takes an input and converts it into a compressed numerical value. The main reason why the hash function is so good for cryptography is that it’s so easy to find output when it takes an input. Still, when given an output, it’s tough to find out the input.

If you have a calculator and you input 1,2,3,4. Your calculator automatically multiplies them all. So the outcome will be 24, but if you tell someone that you multiply some number and the output is 24, then it’s hard for them to find out the exact input.

The only way to find out the input and output is to guess it. The hash function which bitcoin use is called SHA256 — Secure Hash Algorithm 256

Some computers were made just for SHA256 hash problems. They take about 10 min to guess a single input.

Miners

So this group of volunteers spends thousands of dollars on the particular computer to solve the SHA256 problems. It takes so much energy too. However, bitcoin has a built-in system to reward them. Every time they record any transaction on their ledger, they get rewarded for maintaining the blockchain, which is why they are called bitcoin miners.

But that’s not it. For example, if you win to add a blockchain transaction 1st, then automatically today, 12.5 bitcoin is awarded to your account; when bitcoin was created, winning miners claimed 50 BTC for adding each blockchain transaction first.

You also get tipped by adding every transaction to your ledger.

Here is an interesting fact -

‘’Every single bitcoin that exists was created to reward a bitcoin miner.’’

How does cryptocurrency get its value?

The value of fiat(INR, USD, etc.) depends on the state of the economy, and like that, the value of a cryptocurrency is totally based on the market.

You cannot sell anything if there is no one who wants to buy that item like that. If you have something which half of your country wants to own, then automatically you will increase the price of your product.

If people can see owning a shit meme coin, its price will pump, and if no one sees value in owning them, its price will go down automatically.

Thank you so many guys for reading this article. I really hope you don’t hate this article, and we will post content like this in the future, so please subscribe to our email newsletter if you like that kind of stuff, and I hope now you understand how does cryptocurrency were and how does cryptocurrency get its value if you have any questions, then please come, and we will answer all of you !!!

Original article: https://www.assetsliterature.com/2021/05/how-does-cryptocurrency-work.html

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Prateek Tripathi

Introducing Prateek Tripathi, a tech-savvy individual with a passion for all things crypto, blockchain, and coding.