🪙 The Fundamentals to Cryptocurrency

Issue 8 - Finance

Bitcoin, Dogecoin, Ethereum, NFTs, you may have realized that everyone has been talking about cryptocurrencies, especially these days. So what exactly is a cryptocurrency, other than just an online token? Well, you’re at the right place. This article will give you a better understanding of cryptocurrencies. I’ll first talk about the basics of what exactly a cryptocurrency is, and why it’s the currency of the future. So lets get started!

What’s a Cryptocurrency in the first place?

So a cryptocurrency is a digital currency. It’s literally the equivalent of a physical coin that you use to pay for things. You’re exchanging the currency for goods or services, and the same thing goes for crypto. Crypto is just the transfer of digital assets. You can think of the transferring part as a giant spreadsheet, which contains who paid what, to who. This running spreadsheet is called a ledger. Okay that’s what a cryptocurrency is, but why’s everyone going crypto crazy?

What Are The Advantages of Using Crypto?

So there are 2 distinct advantages to using crypto rather than just normal currency.

1. Decentralized

Decentralization in crypto means that, while all the transactions are recorded on one ledger, there are many copies of this ledger. Anyone who’s part of the network has their own copy. Now. you may have heard the terms “Cryptocurrency Mining” or “Bitcoin Mining”. This is just a person who has setup a computer on their end, to sift through transactions on their copy of the ledger. Fun Fact: There are already about 1,000,000 Bitcoin miners around the world, and Bitcoin is just one out of many crypto’s out there. There’s a specific reason that people mine. Because when you mine, you will earn some of that crypto as compensation. Now keep in mind that Bitcoin uses an algorithm called “Proof of Work” (POW). This is an algorithm for some cryptocurrencies, and not all. This algorithm is what allows people to gather compensation. Other currencies like ETHER have just switched to a different algorithm called “Proof of Stake” (POS). By the way there are significant benefits switching to the Proof of Stake algorithm. The benefits include lower energy consumption, faster transaction speeds, and more decentralized mining. POS is where you put some of your own money for stake. The more money you put on the line, the more the algorithm will go to your system. There’s a risk for putting money on the line, because if you try to do something suspicious, the network would just take all the money that you put at stake.

Now if I tried to spend 5 Bitcoins, the network would check all the computers on the network to see if I had enough, and if so, it would update the spreadsheet saying that I now have 5 less Bitcoins.

Since there are so many copies of the ledger, it becomes easy to tell if anyone’s trying anything fishy. For example, if I tried to adjust one copy of my ledger to give myself more money, it wouldn’t get through. The network would just assume that that ledger has just been tampered with, because 99% of the other ledgers wouldn’t say the same thing, and the network would just reset that ledger. To successfully pull off an attack you would need to get at least 51% of the computers that are mining to say the same thing (this is called a 51 percent attack). That as you can imagine, is very hard to do, and that’s what makes Cryptocurrencies so secure.

2. There’s No Need for Traditional Banks

I’ve kind of implied this already, but with crypto, you don’t need real banks. Since it is decentralized there is no need for them, coupled with the fact that you don’t need to print any money or anything like that, because everything is virtual. With crypto, you can make international payments almost instantly, instead of it taking 1/2 a day for it to process, and there aren’t any spending limits. On top of that you don’t need to worry about exchange rates and interest rates.

What’s Behind the Name?

Now the reason for the name “cryptocurrency” is, because they are secured by a technique called cryptography. An example of this is Blockchain, which is what most cryptocurrencies use. Now people often get confused by this: Blockchain is neither Bitcoin nor a currency. Blockchain is just a secure type of ledger. So you know that big spreadsheet/ledger that everyone on the network has? Well blockchain is just a way of organizing it. Funnily enough, into blocks. So each time I buy something, that transaction is recorded as a block. It contains data such as the sender, receiver, the hash of the current block (unique code), and the hash of the previous block. If something in a block is changed, that block’s hash will change. So you may see where this is going. Each block contains the hash of the block before it, and if you combine this with the fact that there are many copies of that ledger it becomes very secure. So if I wanted to create a transaction that say, paid me money, I’d have to create a 51% attack, and edit every block after that, and this is why blockchain is so secure.

I know this was bit of a long article, but I hope you learned something about new about Crypto from this article. With that said, thanks and I’ll see you next week!

-Luke Rapaka

Sneak Peak: Next week I’ll be continuing with the theme of Crypto and talk about NFTs!