Cryptocurrency for Beginners

What Is Blockchain?

Blockchain is the second part of the puzzle that is cryptocurrency. Most of the cryptocurrency is built on blockchain technology. The answer to the question “how does cryptocurrency work?” or “how does crypto work?” is blockchain. You can call blockchain a publicly distributed ledger (digital) technology. In other words,  it’s a collection of interconnected records that are highly resistant to alteration and protected by cryptography.

Owing to blockchain-like technology, the existence of crypto as a viable alternative to fiat money is possible. Whenever a crypto transaction is being made, a new block is created, and onto it, the said transaction is written. The newly generated block will be linked to the one before it, which will be related to the one before that, and so on.

POW and POS

There are two ways to acquire crypto via consensus processes. POW, also known as Proof-of-Work, is the first. POW is a method in which a number of computers compete to gain cryptocurrency. Creating crypto is called mining, and a computer involved in it is called a minor node. The minor nodes compete to guess the NONCE or Number Only Used Once (a pseudo-random number). This complex number will be hard to guess and verify by other minor nodes and the incentive for guessing the NONCE is that the winner will be rewarded the cryptocurrency’s native coin.

A minor node must spend hash power/computer power/processing power to solve the puzzle or guess the number. Stronger the hash power, the more likely it is for the minor node to guess the complex number. However, the network will adjust its difficulty to the computer’s hash power to avoid supercomputer supremacy. Also, individual nodes are allowed to pool their hash power and split the reward playing field for the non-wealthy to compete.

POS or Proof-of-stake is the other consensus mechanism where the reward is acquired irrespective of the hash power of the nodes. The people who go about this mechanism are called validators, as they validate blocks (transactions) and earn the reward. Thus, they do not mine but mint or forge new blocks. To become a validator, a node must stake a certain amount of coins in the network as security, and by staking higher, the node can increase his/her chance of being selected as the validator even though the selection process is random. If the validator is involved in any form of malpractice by any chance, he/she will be punished by taking away their security, called slashing. 

Why Is Crypto So Popular?

Bank transactions could fail from one of the following scenarios: technical issues, transfer limits, hacked accounts, or additional charges like transfer charges. This problem doesn’t happen with crypto because of how crypto works. Also, unlike fiat money, they are immune to counterfeiting and don’t require a centralized authority to govern and manipulate it. Its appeal stems from the fact that it’s secure, enforced by robust encryption algorithms. Its unpredictable nature of value hike due to its demand and the limited quantity is another reason for its popularity.

History of Cryptocurrency

Cryptocurrency is a portmanteau word for cryptography and currency. The words “cryptography” derived from the ancient Greek words “kryptos,” meaning “hidden,” and “graphein,” meaning “writing.” Thus, the intention behind the word was to imply a hidden message which the correct recipient can only read. In the same vein, to understand how cryptocurrency works, one must first examine the history of cryptocurrency, from its humble beginnings to the present day.