A cryptocurrency is typically decentralized digital money designed to be used over the internet. A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. Cryptocurrencies make it possible to transfer value online without the need for an intermediary like a bank or payment processor, allowing value to transfer globally, quickly, 24/7, and for low fees. This decentralized structure allows them to exist outside the control of governments and central authorities.
Cryptocurrencies are usually not issued or controlled by any government or other central authority. They’re managed by peer-to-peer networks of computers running free, open-source software. Generally, anyone who wants to participate is able to.
One question many investors ask is, If a bank or government isn’t involved, how can I trust that a cryptocurrency is secure? It is secure because all transactions are vetted by a technology called a blockchain.
A cryptocurrency blockchain is similar to a bank’s balance sheet or ledger. Each currency has its own blockchain, which is an ongoing, constantly re-verified record of every single transaction ever made using that currency.
Unlike a bank’s ledger, a crypto blockchain is distributed across participants of the digital currency’s entire network. No company, country, or third party is in control of it, and anyone can participate.
Cryptocurrency makes transactions with people on the other side of the planet as seamless as paying with cash at your local grocery store.
Because it is digital and moves across the internet, it is inherently more transferrable than cash, coins, precious metals or other commodities used as a means of exchange.
When paying with cryptocurrency, you don’t need to provide unnecessary personal information to the merchant. This means your financial information is protected from being shared with third parties like banks, payment services, advertisers, and credit-rating agencies.
Because no sensitive information needs to be sent over the internet, there is very little risk of your financial information being compromised, or your identity being stolen.
Almost all cryptocurrencies are secured using a technology called a blockchain, which is constantly checked and verified by a huge amount of computing power.
Because a blockchain is open-source, meaning anyone can view the public ledger at any time, it would be incredibly expensive to attempt to attack the global computing network.
What also lowers the odds of a successful attack is that even if someone had the financial means to attack a blockchain, the odds of becoming the node that can verify false transactions declines exponentially as the network grows, as the rest of the network will also be confirming the validatity of the transactions.
Because cryptocurrency holdings aren’t tied to a financial institution or government, they are available no matter where you are in the world or what happens to any of the global finance system’s major intermediaries.
Every transaction on blockchain networks are published publicly, without exception.
This means there is no room for manipulation of transactions, changing the money supply, or adjusting the rules mid-game.
Unlike a credit card payment, cryptocurrency payments cannot be reversed.
For merchants, this hugely reduces the likelihood of being defrauded.
For customers, it has the potential to make commerce cheaper by eliminating one of the major arguments credit card companies make for their high processing fees.
The network powering Bitcoin has never been successfully hacked over the last decade.
The fundamental ideas behind cryptocurrencies help make them safe: the systems are permissionless and the core software is open-source, meaning countless computer scientists and cryptographers have been able to examine all aspects of the networks and their security.
Proof of work (POW) is the original cryptocurrency consensus mechanism, first used by Bitcoin.
POW and mining are closely related ideas. The reason it’s called “proof of work” is because the network requires a huge amount of processing power.
POW blockchains are secured and verified by virtual miners around the world racing to be the first to solve a math puzzle. The winner gets to update the blockchain with the latest verified transactions and is rewarded by the network with a predetermined amount of crypto.
Proof of stake (POS) systems, uses staking which serves a similar function to proof of work’s mining, in that it’s the process by which a network participant gets selected to add the latest batch of transactions to the blockchain and earn some crypto in exchange.
POS blockchains employ a network of “validators” who contribute, or “stake” their own crypto in exchange for a chance of getting to validate new transaction, update the blockchain, and earn a reward.
The network selects a winner based on the amount of crypto each validator has in the pool and the length of time they’ve had it there, rewarding the most invested participants.
Once the winner has validated the latest block of transactions, other validators can attest that the block is accurate. When a threshold number of attestations have been made, the network updates the blockchain.
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