How does Cryptocurrency work is it the same as encrypted money? Many users use digital currency and cryptocurrency interchangeably, but in principle, these two concepts are slightly different. Correctly understanding these two words can help us understand other related concepts. For this reason, in the rest of this article, we want to fully examine the concept and relationship between the terms cryptocurrency and digital currency and answer the question of what cryptocurrency is.
What is digital currency?
Before answering the question about cryptocurrency, it is better to examine the concept of digital currency. The concept of digital currency can be examined by examining the constituent words. The word currency means money, and the word digital means the use of computer systems. Therefore, digital currency refers to any money formed and used on a digital and computer platform. In the last hundred years and with the expansion of the use of computers in human life, many efforts have been made to create digital money. Digital money can make it easier to work with money, make activities faster, eliminate paper money, and contribute to the globalization of the economy.
In these years, the digital currency has been created in different ways. For example, nowadays, people move money using bank cards. Therefore, the term digital currency can also be used for this type of money. In many computer games, currencies have been created that users can use to perform various activities and use as money to buy in-game assets. In many cases, these currencies can be bought and sold with fiat currency. According to the above reasons, the term digital currency can also be used for computer game tokens.
Cryptocurrencies or cryptocurrencies are a type of digital currency because they are created in the digital space and can be used by digital systems. Still, there are fundamental differences between cryptocurrencies and digital currencies. In the next section, we will answer the question of what cryptocurrency is and examine its differences from other digital currencies.
What is Cryptocurrency How does Cryptocurrency work?
“Cryptocurrency” is a category of digital currencies whose security is provided by encryption techniques. Along with the use of encryption techniques, the decentralization of the transaction review and recording system is the most important feature of cryptocurrencies. Other digital currencies, such as bank accounts, are managed by banks, and an intermediary entity, such as a bank, does transaction confirmation. In computer games, money management is created, and the game maker does their transfer.
In cryptocurrencies, users must agree with other users to update network information in order to confirm transactions. This agreement is done using consensus algorithms. The consensus algorithm allows users to add their honest activity to the rest of the fixed and identical information to the network by paying a fee.
The structure of data storage is also different in cryptocurrency. While user account and transaction information in centralized systems is stored in a database owned by the centralized entity, user account information and transactions in cryptocurrency are recorded using distributed ledger technology. In this technology, all users have access to the information of transactions and user accounts and jointly update the ledger. This technology allows users to check the authenticity of transactions. Blockchain is the main implementation of this technology.
By decentralizing the monetary system, cryptocurrencies took the creation of money and the approval of its transactions out of the hands of governments and into the hands of users worldwide. This change in the management of the monetary system has many opponents among governments and banks. Still, during the years that have passed since the invention of Bitcoin, this cryptocurrency has been able to find a better place among people from all over the world, and this issue has caused the further spread of cryptocurrencies. So far, we have answered the question of what cryptocurrency is. Next, we will examine the most important technologies and techniques related to cryptocurrency.
What is Blockchain in cryptocurrency?
In the previous section, we discussed the concept of cryptocurrency and pointed out its most important features. A ledger or database is needed to create a payment system in which account information and user transactions are recorded and maintained. Without this ledger, it is impossible to check the authenticity of transactions, and users can spend their assets several times ( double spending ). In cryptocurrencies, distributed ledgers are used to remove centralized entities from recording transactions. This means all users have a copy of the ledger and update it simultaneously.
Blockchain is the first implementation of a distributed ledger. In Blockchain, a set of user transactions is collected, and after consensus, it is added to the ledger in the form of a transaction block. The next block is also made according to this process, with the difference that data from the previous block is placed in it so that the two blocks are connected, and changes in the next block lead to the invalidation of the new block. In this way, a chain of transaction blocks is formed by referring to which users can view and confirm the account balance of different users and their transactions.
What is the consensus algorithm in cryptocurrency?
In the previous section, we examined the concept of Blockchain in cryptocurrency. Still, in order to create valid blocks of transactions, it is necessary for network users to reach a consensus on the correctness of transaction information. Various methods have been defined as consensus algorithms to do this task, the purpose of which is to define incentives and punishments for the honest activity of users in the network. In the consensus algorithm, the goal is to check the validity of transactions, collect them in blocks and add them to the Blockchain after the approval of the majority of users.
As the first cryptocurrency created, Bitcoin uses the “Proof of Work” consensus algorithm. In this algorithm, after sending the transactions to the network, the network users, who are called miners, check the feasibility of the transaction and the authenticity of the transaction’s sender by checking the user information in the Blockchain and the signature of the transaction. After confirming it, They add it to their list of block transactions. After collecting a certain number of transactions (1 MB in Bitcoin), consensus work is started by miners.
In the proof of work, an equation is considered for each block, which miners must solve using their computing device and energy consumption. Solving this equation is done in an iterative process, and there is no other way. Users with higher processing power have more chances to solve the equation. However, the process of reaching the answer is still completely random, and users with low power may solve the equation sooner.
Any user who solves the equation first will announce their answer to others so that they can confirm its correctness. With the approval of the majority of miners, the block is added to the Blockchain, and the winning miner gets a reward from the network’s cryptocurrency chance. Most of the network does not accept the block produced by the malicious miners, and the entire fee they pay to perform the calculations is lost. The process of solving the equation in the proof-of-work algorithm is called digital currency mining because its output is the production of new cryptocurrency in the network.
There are other consensus algorithms in the cryptocurrency space, the most important of which is the “Proof of Stake” consensus algorithm. In this algorithm, locking tokens are used to secure the network instead of the computational process for consensus on transactions. This process is called digital currency staking, which consumes less energy and is faster. After answering the question of the consensus algorithm in cryptocurrency, in the next section, we will examine what cryptography is in cryptocurrency.
What is encryption in cryptocurrency?
“Cryptography” is the science of transferring information securely in the digital space. In the cryptocurrency space, the information that is transferred between users has material value. For this reason, the safe transfer of information is considered one of the most basic features. In response to the question of what is the purpose of encryption in cryptocurrency, it can be said that its purpose is to encrypt transaction information at the source and decrypt it at the source in such a way that no other person or system can decrypt the transaction information along the way. Any changes in the transaction by Users can be identified.
Cryptography is generally divided into “Symmetric key cryptography” and “Asymmetric key cryptography”. In the symmetric type, the encryption and decryption key is the same, and for this reason, you must provide your key to another user to send a message or transaction. This method is helpful in social networks and securing information in centralized servers. Still, it is unsuitable for transferring cryptocurrency because users can access your assets by accessing your key.
In asymmetric encryption, the “Public Key” is used to encrypt information, and the “Private Key” is used for decryption. In this case, you can send a transaction to each user with the public key, and the only person who can decrypt the desired message is the user who has access to the related private key. This type of encryption is used in cryptocurrency to create user accounts that enable them to securely transfer digital currency and access assets.
In addition to these two functions, there are also hash functions in cryptography that can produce an output with a fixed size for any input so that it is not possible to go back from the output to the input, and the generated output is unique. In cryptocurrency, information hashing is used for users to agree on correct information. In the next section, we will examine what a cryptocurrency wallet is.
What is a cryptocurrency wallet?
What a cryptocurrency wallet is? one of the most frequently asked questions of digital currency market users. A digital currency wallet is a tool that allows users to connect to the Blockchain by creating private and public keys to record transactions and receive tokens. Some wallets are specific to one Blockchain, but today most famous wallets like Trust Wallet support many blockchains and their coins and tokens.
Using the wallet, users can access their assets on the Blockchain, send them to others, or receive cryptocurrency from them. In addition to the capabilities above, wallets such as Metamask allow users to directly buy and sell digital currency and convert them directly to each other. Other features, such as cryptocurrency staking and support for NFT tokens, are also available in some wallets.
What is a cryptocurrency exchange?
Users need access to miners and other people who have cryptocurrency to convert their fiat currency, such as dollars and rials, into cryptocurrency. A cryptocurrency exchange is a system that provides this possibility for users. Users can buy and sell cryptocurrencies using a cryptocurrency exchange. A cryptocurrency exchange can be related to a specific country or pursue its activity internationally. Robex digital currency exchange is one of the most reliable Iranian exchanges that supports more than 300 cryptocurrencies.
A decentralized cryptocurrency exchange is another type of exchange used to exchange digital currencies with each other in a decentralized manner. In this type of exchange, liquidity pools consisting of two or more cryptocurrencies and automatic market maker algorithms defined by smart contracts are used to perform exchanges. A smart contract is coded by programmers consisting of conditional statements that are added to the Blockchain and executed automatically.
UniSwap and PancakeSwap are among the most famous decentralized cryptocurrency exchanges. You may be wondering what the first cryptocurrency is. We will answer this question in the next section.
Is Bitcoin the first cryptocurrency?
In the previous sections, we answered the question of cryptocurrency and examined its related technologies. Many people consider Bitcoin the first cryptocurrency created, but this is not a correct idea. David Chaum, a professor at the University of California and Berkeley, worked for years on cryptography and digital money creation. In 1995, he introduced the first digital currency based on cryptography called “eCash”. This digital currency was created using cryptography but was still centralized.
In the E-Cash system, all data was stored on a server, and it was still possible to carry out various cyber and physical attacks on the server. Although the security points were observed to a high extent, and it was very difficult to break into this system (like what we see in different banks in the world), the control was still in the hands of a particular group that could make serious changes with any manipulation.
E-Cash was considered a very new idea in its time and prevented users from carrying large amounts of banknotes. The security of this system was also high due to the use of encryption techniques, but these features could not convince the public to use this cryptocurrency.
After E-Cash, many attempts were made to create a suitable cryptocurrency, each with different disadvantages. Specialists wanted to create a cryptocurrency that would have high security, enable various transactions, and at the same time not be centralized. The creation of Bitcoin in 2009 was the result of these efforts.
Bitcoin was the first digital currency that, in addition to having the characteristics of money and providing security with cryptography, was completely decentralized. Satoshi Nakamoto, the creator of Bitcoin, is an unknown person or group who came up with the idea of Bitcoin after the 2008 financial crisis and implemented its technology in 2009. Bitcoin uses cryptographic techniques to create user accounts and secure data transmission. Blockchain technology and consensus algorithm ensure the network’s decentralization and economic incentives guarantee the honest activity of users.
Today, users worldwide can buy Bitcoin from different digital currency exchanges, convert their fiat currencies into this cryptocurrency and use it in various financial matters. In addition to Bitcoin, it is possible to see the price of Tron, Tether and other famous digital currencies and buy and sell them publicly in most countries.
After Bitcoin, what is the history of cryptocurrency?
In the previous section, we learned what the first cryptocurrency was and why Bitcoin is known as the first cryptocurrency. In this section, we want to address the question of what is the history of cryptocurrency and talk about the future projects of Bitcoin. After Bitcoin, various projects generally used the core of Bitcoin. Many of them have disappeared altogether. But some major projects that directly or indirectly used Bitcoin include “Bitcoin Cash”, “Litecoin”, and “Dogecoin”. All digital currencies other than Bitcoin are also called altcoins.
After Bitcoin, each of these projects tried to solve somehow the deficiencies and problems that were felt in this project. This mental model existed until a few years after the invention of Bitcoin, when Ethereum revolutionized digital currencies in general by creating new concepts. After Ethereum, most new projects like Tron focused on increasing scalability.
In this article, we examined the concept of cryptocurrency and its difference from digital currencies and briefly examined the history of created cryptocurrencies. Bitcoin is the first digital currency that presented itself as a payment system, but this does not mean that all cryptocurrencies are active in this field. Now that you are familiar with cryptocurrency, it is good to know the use of digital currency.