We've all heard of Bitcoin and the cryptocurrency craze, but how much do we truly know about it? With 2216 cryptocurrencies on the market according to investing.com, it's time to take a deeper look. Below are basic terms and definitions you need to know to help you understand the basics of cryptocurrencies.
What are Cryptocurrencies?
Cryptocurrencies are electronic peer to peer currencies, meaning participants can exchange directly with each other without a third party to process the exchange. Cryptocurrencies operate independently of a central bank. It's good to know that they don't physically exist. They are a digital or virtual currency that use encryption methods called cryptography for security.
What is Cryptography?
When a message is sent using cryptography, it is changed (or encrypted) before it is sent. Cryptography not only protects data from theft or alteration, but can also be used for user authentication. In cryptocurrency it is the security feature that regulates the generation of units of currency and verifies the transfer of funds. These are two cryptography methods used in cryptocurrencies:
Symmetric Encryption Cryptography - The sender and receiver use the same shared key. Meaning the sender will use the key to encrypt the message and the receiver will use the same key to decrypt and display the message. A simple example, if we set up an encrypted message where K=1, A=2 and P=3 and sent 12332, the receiver using the same key would decrypt the message and see KAPPA.
Asymmetric Encryption Cryptography - Also known as public key cryptography, uses public and private keys to encrypt and decrypt data. So unlike symmetric encryption there are two keys. These keys are simply large numbers that have been paired together but not identical. The receiver has a public key that can be given to any sender to encrypt a message. Once the public key has been used to encrypt the message only the receiver with their confidential private key can decrypt the message. The figure below is a simplified view of asymmetric encryption:
What is Blockchain?
Blockchain is the driving force behind cryptocurrency. It is where transactions and balances of a given cryptocurrency are recorded. Blockchain is a cryptographically secure distributed database/ledger existing on multiple computers at the same time called "nodes," this makes it decentralized. It is constantly growing as new sets of records or "blocks" are added to it. Each block contains a timestamp and a link to the previous block so that a chain is formed.
What are Miners?
Miners are the people behind the nodes. They validate blocks before they can be added to the blockchain which is known as mining. To validate blocks, miners compete to solve mathematical problems based on cryptographic hash algorithms. The solution found is called proof-of work. Miners are rewarded in cryptocurrency.
Someone requests a transaction from the cryptocurrency app and it is sent out to the entire network which is made up of nodes. The miners behind the nodes then validate the transaction using cryptographic algorithms.
Once the transaction is validated it is verified and confirmed by other miners. It is then used to create a new block of data for the blockchain.
The new block is then added to the end of the blockchain and the transaction is now complete and permanent. No one can undo or delete the transaction.
(Image source: Blockgeeks.com)