Cryptocurrency is a digital currency that operates on decentralized networks based on Blockchain technology. However, netizens frequently use virtual currency for it. Digital currency uses cryptography to secure financial transactions, control the creation of new units, and verify the transfer of assets.
Plastic money, cheques, paper currency, physical coins, online bank transfers and e-money orders are not cryptocurrencies. These are typical modes of money flow.
Stay on my blog. I am discussing in detail all features of cryptocurrency one by one. You can also navigate to this blog by just clicking on any heading in the table of contents below.
Unlike traditional fiat currencies, any central authority, such as a government or central bank does not control digital currencies.
Beginning of Cryptocurrency
With the emergence of blockchain technology, some pseudonymous developers came up with Bitcoin in 2009. Mindset behind it to develop a peer to peer to electronic cash system. As time passed, Bitcoin was accessible to the public, crypto wallets were created, decentralized exchanges were established and then trade of Bitcoin started.
Decentralization, unhindered money transfer, 24/7 trade of crypto coins and security of transactions made Bitcoin popular. It triggered the entry of its competitors coins like Dogecoin, Ethereum, Litecoin and many others.
Blockchain and Cryptocurrency
At the core of cryptocurrency, it is the concept of blockchain which is a distributed and immutable ledger. It consists of a chain of blocks, where each block contains a list of transactions. These blocks are linked together using cryptographic hashes. Blocks ensure that previous transactions cannot be altered or tampered. Hence, transaction processing in blocks is more secure than typical banking channels.
Bitcoin is a pioneer cryptocurrency and the most famous crypto coin. Litecoin, Dogecoin, Ethereum, TRON, Solana and Stellar are other famous crypto coins.
How Does Cryptocurrency Work?
Let’s take a bird eye’s view of it. Here’s a detailed explanation of how cryptocurrencies work:
1. Decentralization
The hallmark feature of cryptocurrencies is their decentralized nature. Instead of relying on a central authority, they operate on a network of computers (nodes) spread across the globe. Each node maintains a copy of the entire chain of blocks, ensuring transparency and security.
2. Transactions
When a user initiates a cryptocurrency transaction, it is broadcasted to the network. Transactions typically include the sender’s and receiver’s public keys (cryptographic addresses), the amount of cryptocurrency being transferred, and other necessary information.
3. Consensus Mechanism
To validate and confirm transactions on the network, cryptocurrencies use consensus mechanisms. The most well-known consensus mechanism is Proof-of-Work (PoW), which is used by Bitcoin. In PoW, miners compete to solve complex mathematical puzzles. The first one to solve it gets the right to add the new block to the chain and receives a reward in the form of newly created cryptocurrency (block reward) and transaction fees.
4. Mining and Validation
In PoW-based cryptocurrencies, mining involves using powerful computers to solve these puzzles. The difficulty of the puzzles is adjusted so that new blocks are added to the chain approximately every ten minutes. Mining secures the network, prevents double-spending, and maintains the integrity of the blockchain. However, mining is an energy intensive exercise because it involves a large network of powerful computers.
5. Cryptocurrency Creation
Unlike fiat currencies, which can be printed at will by governments, cryptocurrencies have a predetermined supply and controlled issuance. For example, Bitcoin has a maximum supply cap of 21 million coins, which makes it deflationary in nature.
6. Crypto Wallets
To store and manage cryptocurrencies, users need digital wallets. These wallets come in various forms, such as software wallets (online, desktop, mobile) or hardware wallets (physical devices). Each wallet is associated with a pair of cryptographic keys: a public key (used as an address to receive funds) and a private key (used to sign transactions and access the funds).
7. Security and Anonymity
Cryptocurrencies offer a high level of security due to their cryptographic nature. Transactions are linked to cryptographic keys, and as long as users safeguard their private keys, their funds are secure. Moreover, blockchain’s decentralized nature reduces the risk of single points of failure.
8. Usage of Cryptocurrency
Cryptocurrencies can be used for various purposes, including peer-to-peer transactions, online purchases, investments, remittances, and more. Some cryptocurrencies also support smart contracts, which are self-executing contracts with the terms of the agreement written directly into code.
Stock Exchanges vs Decentralized Exchanges
Regulated stock exchanges facilitate trade of shares (some jurisdictions use stocks), financial instruments and mutual funds. Whereas, decentralized exchanges allow 24/7 trade of crypto coins, smart contracts and non-fungible tokens. Stock exchange remains closed on weekends. Crypto exchanges are available round the clock the whole week. Government authorities regulate stock exchanges which are centralized.
Regulation and Adoption of cryptocurrency
The regulatory landscape for cryptocurrencies varies across different countries and jurisdictions. Some governments embrace cryptocurrencies, while others have imposed restrictions or bans on their use. Cryptocurrency adoption has grown steadily over the years, with more businesses and individuals accepting digital currencies as a legitimate form of payment.
But, some jurisdictions like the United States, UK and Europe are trying to control mining, supply and trade of digital currency. In most Asian countries, cryptocurrency is still illegal. However, India and Australia have accepted digital currency with some restrictions. In these countries, profit earned on trading of crypto coins is taxable.
Even Russia has used mining to generate finance for Ukrainian-Russia conflict and war. Extensive mining of coins is conducted in Ukraine, USA, China, Netherlands, Switzerland and Russia.
Taxation of Digital currency
Australia and India have allowed the use, trade and transfer of cryptocurrency. Now, virtual currencies are assets in the eyes of tax laws of these countries. Gain on sale of bitcoins, NFTs, smart contracts and other digital assets is accounted for capital gain.
Challenges and Future of digital currency
Cryptocurrency is facing challenges related to scalability, energy consumption (in PoW systems), regulatory uncertainties, and volatility. However, ongoing research and development are addressing these issues, and various projects are working on improving the efficiency and sustainability of cryptocurrency networks.
With the growth of Web3, it is expected that digital coins, NFTs, smart contracts and blockchain based financial instruments will replace existing banking systems for online shopping, ecommerce, and transactions processing over the internet. Because, Web3 is being developed on blockchain.
Last Words on Cryptocurrency
To pen off, cryptocurrency is a digital or virtual currency that operates on decentralized networks, using blockchain technology and cryptography for secure transactions and validation. Its decentralized nature, cryptographic security, and various use cases have contributed to its popularity and potential to revolutionize the financial industry and beyond.
As the technology continues to evolve and mature, cryptocurrencies are likely to play an increasingly significant role in the global economy. It’s essential to note that the cryptocurrency space is diverse, with thousands of different digital coins and tokens, each with its unique features, use cases, and technologies. Bitcoin was created in 2009 by an anonymous person or group using the pseudonym Satoshi Nakamoto. Bitcoin was the first and remains the most well-known cryptocurrency. But now, many coins have emerged since then, including Ethereum, Ripple (XRP), Litecoin, and many more. It keeps on ………………….. moving.
LET’S SEE …… WHERE ALL THIS REVOLUTION GOES
