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Cryptocurrency and How It Works

Cryptocurrency

Cryptocurrency; Credits Non-Profit Law Blog

Over here at TechStory we have glossed over a few Indian startups that deal in cryptocurrency and how they began. But before we do a deeper dive into the cryptocurrency landscape of India, it could be a good idea to get a low-down on hoe cryptocurrency actually functions and works. This is in order to get a proper understanding of the business model of cryptocurrency startups and how is a currency exchange becoming a viable model for a business.

So here is a breakdown on cryptocurrency, how it works, and how is different from traditional and digital modes of money.

First Things First- What Is Cryptocurrency?

A cryptocurrency is a digital form of currency that is built with rules that enable encryptions which makes all transactions by an entity extremely secure and very difficult to hack or fake.

The biggest feature of cryptocurrency that distinguishes it from other forms of currency is that it is a publicly owned, decentralized form of exchange. A centralized form of exchange would be something like the Reserve Bank of India that is the central banking authority in the country and is an operative of the government. Cryptocurrency has no such special authority. How it is decentralized we shall speak about later in this article. But for now, the decentralized functioning of cryptocurrency makes it immune to authoritarian interference, government control, or bureaucratic manipulation.

Cryptocurrencies conduct transactions through dual- public and private- keys, which makes the process really simple. The transfers for these currencies can happen through very minimal processing fees which allow users to evade the large fees and taxes implied by other financial institutions.

Who Came Up With The Idea Of Cryptocurrency?

The vision for the world’s very first cryptocurrency was envisioned by a man who goes under a name called Satoshi Nakamoto- “the unknown inventor of Bitcoin”. Bitcoin is the first ever invented and the most important cryptocurrency worldwide.

In his announcement of Bitcoin in late 2008, Satoshi said he developed “A Peer-to-Peer Electronic Cash System.“His goal was to invent something; many people failed to create before digital cash.

“Announcing the first release of Bitcoin, a new electronic cash system that uses a peer-to-peer network to prevent double-spending. It’s completely decentralized with no server or central authority.” – Satoshi Nakamoto, 09 January 2009, announcing Bitcoin on SourceForge.

The biggest and the most important part of Satoshi‘s invention was that he found a way to build a decentralized digital currency network system. In the nineties, there have been many attempts to create digital currencies but they had all failed and burned to the ground.

“… after more than a decade of failed Trusted Third Party based systems (Digicash, etc), they see it as a lost cause. I hope they can make the distinction, that this is the first time I know of that we’re trying a non-trust based system.” – Satoshi Nakamoto in an E-Mail to Dustin Trammell

Until Satoshi came in the scene and proved his vision to be true no one has believed that something like this could even be possible.

So How Does It Function?

Let us understand how traditional money works in your bank account. It is nothing but a database of how much money you have, how much you’re spending or how much you are receiving. The notes and coins in your wallet? Well, they are a database too. A database of how much you can buy or spend. The amount you receive or spend corresponds to either the database of your bank or the database of notes and coins in your wallet.

So put simply. cryptocurrencies are a public database. Which means that rather than one authority keeping your money and keeping a check on your transactions, there is a public database or ledger of transactions. If you make a transaction where you give money to someone everyone on that network will check whether money has been withdrawn out of your account, whether it has gone to another account.

“A transaction is a file that says, “Bob gives X Bitcoin to Alice“ and is signed by Bob‘s private key. It‘s basic public key cryptography, nothing special at all. After signed, a transaction is broadcasted in the network, sent from one peer to every other peer. This is basic p2p-technology. Nothing special at all, again.”

This is, of course, a simplified version of what crypto actually is. This whole process is done programmatically.

Here is a video to explain the functioning of cryptocurrencies in a more simple manner:

To summarize:

  • Cryptocurrency transactions and balances are recorded on a public digital ledger called a blockchain.
  • Cryptocurrencies can be accessed through software called wallets (transactions are broadcast to the network to be added to the blockchain via transactions created in wallets). This can be equated to online banking (where you have account numbers and passwords and move funds between accounts).
  • Cryptocurrencies can be bought through a broker or traded on online cryptocurrency exchanges (like a stock exchange).
  • Unlike bank credit, which represents a centrally controlled and issued fiat currency (like the US dollar), cryptocurrency is decentralized and thus not centrally controlled.

The Cryptocurrency Future:

Countries like India are already on their way to promote cashless economies which s why something like cryptocurrencies will see a leap forward. The future of cryptocurrency can be summarized in this one very well thought statement:

“In the next few years, we are going to see national governments take large steps towards instituting a cashless society where people transact using centralized digital currencies. Simultaneously, the decentralized cryptocurrencies – that some even view as harder money – will see increased use from all sectors.” – Caleb Chen London Trust Media

 

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