The Future of Money: How Crypto Works
Omar Mahmoud
Omar Mahmoud
Let’s begin with a quick refresher. Cryptocurrency is a digital system of money in which all transactions are recorded, protected and kept anonymous. It is a currency that has no single governing authority.
What is the tech behind Bitcoin and Crypto?
The basic technology of Bitcoin is Blockchain, which is a type of digital ledger. A ledger is a collection in which account transactions are recorded. Blockchain is basically a record of every instance of buying and selling that is copied and pasted across the entire network of systems. As the name suggests, a blockchain is a chain of blocks, see figure below. Each block contains a number of transactions, and every time a new transaction occurs, a record of that transaction is added to the next-to-be-created block and, then, it can be accessed by every ledger’s participant. This scheme is similar to a database that is controlled by multiple participants and can be referred to as Distributed Ledger Technology.
Example of blockchain. Image source: https://www.forbes.com/sites/nikkibaird/2019/06/16/three-big-blockchain-technology-challenges-that-impact-retail/?sh=55e61e03cc4a
The blockchain is also immutable (cannot be altered), which makes it safe to use, because if hackers want to change anything, they’ll have to change every single block in the chain. Also, every block is connected to the previous one with a special code (called a hash), and, therefore, any external user can’t change one block without having to change every block. In addition, to reach a previous block, the hacker has to go through the entire link. Why, you might ask, can’t the hacker simply go to the last block? In fact, only consecutive blocks are connected. Something that increases the security is the fact that block 2, for example, isn’t connected to block 5.
So how does this relate to cryptocurrency?
Blockchain forms the foundation for cryptocurrencies. Normal currencies have a central governing authority, and a user’s data and their money are technically at the mercy of their bank or government. If a user’s bank is hacked, the client’s private information is at risk, and so is their money. If the client’s bank collapses, or the client lives in a country with an unstable government, the value of their money may be at risk. By spreading its operations across a network of computers and systems, blockchain allows Bitcoin and other cryptocurrencies to work without a central authority. This not only reduces risk, but also eliminates many of the processing and transaction fees.
Why Do Bitcoins Have Value?
Currencies have value because they can function as a store of value and a unit of exchange. Currency is useful if it can maintain its relative value over time. Assigning value to currencies is a matter of debate. Originally, their value came from physical things, like gold, whose value was decided by how difficult it was to extract. In other words, the value of a currency is a measure of its demand and its ability to create trade and business. Bitcoin has a huge value for two reasons. One, it’s a rare thing, with barely any tokens (a single unit of a Bitcoin) coming into circulation, and two, it’s increasing in popularity with more and more communities existing online.
So, there you have it. That’s is an overly simplified description of the tech behind cryptocurrency. In the next installment, I’ll be talking about crypto mining and how you can acquire crypto. I’ll also be going over different types of cryptocurrencies.
References:
https://www.investopedia.com/ask/answers/100314/why-do-bitcoins-have-value.asp
https://www.euromoney.com/learning/blockchain-explained/what-is-blockchain
https://parentzone.org.uk/article/everything-you-need-know-about-cryptocurrency#:~:text=A%20
https://www.investopedia.com/terms/d/distributed-ledger-technology-dlt.asp
Page Layout by Puneet Singh