Bitcoin this, Blockchain that. All we ever hear about lately is cryptocurrencies and how they are going to transform the world. But what exactly is cryptocurrency and how does it work?
Cryptocurrency is a digital currency that uses cryptography for security, which makes it difficult to counterfeit. The most well-known cryptocurrency that you may have heard of is Bitcoin. Despite is fluctuating value, it still remains the most popular form of digital currency today.
Cryptocurrencies have become a global phenomenon, as Thomas Carper, US-Senator said: “Virtual currencies, perhaps notably Bitcoin, have captured the imagination of some, struck fear among others and confused the heck out of the rest of us.” (1)
What are the origins of Cryptocurrencies?
So let’s go right back to the beginning and break this down. Cryptocurrencies emerged as a side product of another invention. The unknown inventor of Bitcoin, Satoshi Nakamoto never intended to invent a currency but instead a Peer-to-Peer Electronic Cash System. The concept resembles peer-to-peer networks for file sharing.
In a decentralised network like Bitcoin, every single participant needs to ensure that there is no ‘double spending’. Simply, double spending is a fraudulent technique of spending the same amount twice. The traditional solution was a trusted central server that kept records of the balances and transactions. However, this method always entailed an authority in control of your funds and personal details.
What is Blockchain and how does it work?
In the instance of cryptocurrencies this is where Blockchain comes in. Blockchain is a public ledger of all transactions that have ever happened within a network, available to everyone. This means that everyone in the network can see every account’s balance, allowing the digital currency to operate independently of a central bank. In order for a cryptocurrency network to work, all participants must be in agreement about the legitimacy of balances and transactions.
What can you do with Bitcoin?
Bitcoin can be used for online transactions between individuals and nowadays, there are a lot of merchants that accept Bitcoin as a form of payment unlike before. They range from online retailers like Overstock and Newegg to local shops, bars and restaurants. Bitcoins can also be used to pay for hotels, flights, jewellery, apps and computer parts, or even a college degree.