Cryptocurrency: The Latest Medium of Exchange

With the rapid growth of the internet, our lifestyle, methods of conducting education, business, and entertainment have evolved. Digital payments have created a lot of buzz recently due to the convenience it offers, which has just increased amid the pandemic. 

Digital payments have come a long way in terms of accessibility. You can send money to anyone at any place in the world within seconds. 

The global digital payments industry has witnessed several innovations in recent times. The industry is estimated to hit an astronomical figure of $6.6 Trillion in 2021.

Today, there are several options for digital payments such as e-wallets, UPI, P2P mobile payments, bank transfers, and the ‘hot’ cryptocurrency.

What Cryptocurrency Means?

Cryptocurrency, or crypto, is a blockchain-based digital currency – it is a decentralized mean of exchange that you may use to purchase goods and services online securely. Crypto uses an online ledger, encrypted with powerful cryptography, making it impossible to double-spend or counterfeit. 

Several companies have come up with their own currencies which are known as tokens, and these can be used to purchase any goods or services that company provides. You might be familiar with the crypto giants such as Bitcoins and Ethereum, but there are more than 4,000 different cryptos that are traded publicly.

This digital currency holds the promise of facilitating funds transfer without any third-party link such as a bank or credit card company. Instead, these transfers are secured by private keys and public keys, and various incentive systems such as Proof of Stake or Proof of work.

When understanding what cryptocurrency means, know that private and public keys are forms of cryptography. The private key allows users to access their cryptocurrencies and used to sign transactions, while the public key allows them to receive it in their accounts.

Blockchains are an integral part of many cryptocurrencies. There are organizational methods – used to ensure the integrity of transactional data. Experts believe that blockchains and other related technologies are likely to disrupt several industries, including law and finance. Plus, they have praised various aspects of this currency such as portability, inflation resistance, divisibility, and transparency.

Portability: As a digital currency, crypto eliminates any concern regarding its portability. You can access your crypto from any place in the world.  

Inflation Resistance: Many experts believe that crypto is the best hedge against rising consumer prices, because it is designed to have a limited supply unlike normal currency. So, this digital currency cannot be devalued by any government or bank.

Divisibility: Cryptos are infinitely divisible. For instance, the most popular crypto, Bitcoin, can be divided into eight decimal places, meaning that you can use 0.00000001 BTC in a transaction. However, the related software and protocol can be modified when necessary to allow even smaller amounts.

Transparency: Blockchain is considered to be a transparent system in which any member can view all information on that particular network. Talking about crypto, it uses the transparency of blockchain to allow its users to go through the transaction history.

However, this popular digital asset is opposed by a lot of people due to a number of reasons. The most significant one is the semi-anonymous nature of this currency, which makes it suitable for illegal activities. Crypto’s exchange rate volatility and vulnerabilities of the infrastructure also attracted much criticism.

Exchange Rate Volatility: Price fluctuations are quite common when it comes to cryptocurrencies, and it is driven by several factors. For5 instance, the  value of Bitcoins has been extremely volatile. The volatility of its price reached to approximately 8%, which i9s double than that of the 30-day period in January 2015.

There are several reasons for the unstable volatility of cryptocurrencies:

  • Negative news may affect its adoption rate
  • The perceived value of crypto sways
  • Uncertainty of future
  • Huge currency holder risks
  • Security breaches cause volatility
  • High profile losses Raise fear
  • Tax treatment lifts volatility

Vulnerabilities of Infrastructure: Despite being a secured digital payment method, there are a few vulnerabilities of the cryptocurrency exchange that have been identified.

  1. Phishing

Phishing is a fraudulent activity aimed to access critical data of the targets. Even the most advanced technological measures cannot guarantee 100% protection from phishing attacks.

  1. Lack of hot wallet protections

An online cryptocurrency wallet that is connected to the internet, referred to as “hot wallet.” Most of the cryptocurrencies use a single private key to secure these wallets. If a hacker manages to get access to the key, he or she will be able to break into the wallet associated with that key.

  1. Weak protection of employee login credentials

The workers at cryptocurrency exchanges often store their credentials in an unsafe way and use weak passwords. It makes it easy for the criminals to access those credentials.

The following attacks used employee login credentials:

  • BitThumb (2017)
  • NiceHash hack (2017)
  • YouBit hack (2017)
  1. Software vulnerabilities

The blockchain field still being in its infancy, does not apply sufficient information security measures to cryptocurrency exchanges. Such software vulnerabilities are ideal conditions for hackers.

  1. Transaction malleability

Each crypto transaction involves a signature that can be manipulated before closure. One of the largest attacks in the history of cryptocurrency, “Mt, Gox” hack, was done by altering codes of a public ledger prior to posting the initial transactions.

What Is Cryptocurrencies Examples

There are over 4,000 cryptocurrencies to be used as a method of transaction. Some of the most common examples are:

  • Bitcoin
  • Ethereum
  • Dash
  • Ripple
  • Litecoin
  • zCash
  • Dogecoin

How Cryptocurrency Works

Cryptocurrency works quite similar to a bank debit or a credit card. Both involve a complex system – that is responsible for issuing currency and records balances and transactions, allowing users to receive and send money electronically. 

The most significant difference between banking systems and cryptocurrency is that Cryptocurrency uses an algorithm instead of banks or governments issuing the currency and keeping record.

How Does Cryptocurrency Work For Beginners?  

Funds are transferred in the form of cryptocurrency between peers using a software known as “cryptocurrency wallets”. It is a secure digital wallet – that is used to store, send, and receive cryptocurrency. Most cryptocurrencies have their own digital wallets. There are some wallets associated with multiple currencies.

The user creating the transaction needs to use this wallet to transfer money from one public address to another. Plus, the user must have the private key to be able to transfer balance. All crypto transactions made between peers are encrypted, which is then broadcast to the network and added to the public ledger.

These transactions are recorded on a public ledger via a process named “mining.” all users of the concerned cryptocurrency can access the ledger whenever they want. They can either download the ledger or use a copy of the software, known as a “full node” wallet.

All cryptocurrency transactions are public, but the name of the recipient and sender is encrypted. Each of these transactions lead back to a unique keys set. The owner of the keys set has the authority over the entire amount of cryptos associated with those keys.

Several transactions are added to the public ledger at once. Miners add these blocks of transactions sequentially. Thus, the name “blockchain” was allocated for the ledger and the technology behind it. It is a chain of blocks of cryptographic transactions.

However, there are some altcoins that use different mechanics. For example, some altcoins do not use blockchains at all, while some offer completely private transactions.

How does blockchain work?

The blockchain is a type of digital decentralized bank ledger – it is a record of balances and transactions. Whenever a cryptocurrency transaction is made, all users hosting the blockchain copy receive details of that transaction.

Miners are a special type of users, who try to solve a cryptographic puzzle using a software. Once the puzzle is solved, the miners can add a block of transactions to the ledger. The first miner to solve the puzzle is rewarded with a few newly mined coins. Plus, the creators of those transactions will have to pay a transaction fee to the miner. Minber often pull computing power to share the new coins.

The entire algorithm depends on consensus. If the majority of miners submit equal transaction data, it signifies that the transactions are correct.

Blockchain security relies on cryptography. Each block of transactions is connected to the previous block’s data through one-way cryptographic codes, known as hashes. The hash is designed to prevent tampering with the blockchain.

How does cryptography work with cryptocurrency?

The keys responsible for transferring funds in the blockchain use a specific kind of one-way cryptography, known as public-key cryptography. It is a system that uses both private and public keys. Such key pairs are generated through cryptographic algorithms – based on mathematical problems, called one-way functions.

The hashes also use a similar type of cryptography. All transaction data stored and sent to the blockchain is tokenized. Tokenization is a form of one-way cryptography which contains partial data. 

The basic idea is that cryptocurrency uses a specific type of cryptography that facilitates one-way data computing, but prevents computing of data the other way without a key.

Basically, the answer to how does cryptocurrency work for dummies is – cryptography.

Crypto Mining

Crypto mining is the process of gathering cryptocurrency as a reward for completing a task. People generally crypto mine to generate a new source of income. Plus, many people do it to gain greater financial freedom without any involvement of banks or government.

You can mine cryptocurrencies by solving cryptographic puzzles through computing. It involves validating data blocks and inputting transaction records to a public ledger. 

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