A Simple Guide to Cryptocurrency

The world was revolutionized by a white paper published in 2008 under the pseudonym of Satoshi Nakamoto. It appeared like any other academic paper suggesting a solution to a problem. Here it was double-speeding. The real motivation behind the system was to develop a payment system that did not rely on any third party for verification. It was a hybrid of physical cash and technology.

They are regarded as the email in the economic realm. The currency is nothing but the history of transactions with no physical form. There is no third party or regulator as in Fiat Money. Every transaction is distributed in the public domain. No one owns the ledger that uses Blockchain technology; hence there is no intermediary.

Due to its dynamic and evolving nature, bitcoin is globally recognized as a digital currency. So, to deal with this, institutions such as Unbanked are emerging to regularise the trading of cryptocurrencies by providing banking services such as crypto accounts, debit cards, etc.

What is the Problem of Double-spending?

An electronic payment system comprises a process in which the monetary value of the cash can be transferred electronically in the form of cash data files. But, it can be copied any number of times and replicated, thus losing its value. This is known as double-spending. 

Traditionally, this problem is resolved through a centralizing authority that verifies the nature and ownership of transactions. To access the services of this authority, the sender and receiver must have accounts. Here, both parties are trusting the intermediary. The only vulnerability these systems have is that they are constantly targeted by hackers. Also, the central authority must have some credibility.

Satoshi, Bitcoin, and Bitcoin Blockchain

A single bitcoin represents a virtual monetary value that is divided into 100 million “Satoshis”. The Bitcoin blockchain is nothing but a consolidated list of previous transactions. This is the ledger of the Bitcoin network, which is available in the public domain.

There is a finite number of bitcoins that can be mined, i.e., 21 million. Each block added to the blockchain ledger earns some rewards for the miner. The period between one block and another is ten minutes. For every 210,000 blocks added, the value of bitcoin to be earned gets halved. The first block was added in 2009. It is estimated that all the bitcoin would be mined by 2140.

Several bitcoins are fixed, which can lead to the devaluation of the currency. Bitcoin is like a fiat currency that has no intrinsic value. It is different from fiat currency because it is not recognized by any government or central authority. Its value is determined by the dealers and miners. If they think that a Bitcoin is of no value and no one purchases it, it will instantly become worthless.

How are Bitcoins mined?

A buyer initiates a transaction against the seller’s account through a cryptographic key. To verify its details, the transaction with a fee becomes open to the Bitcoin network, where miners verify its legitimacy. A miner collects several transactions and collates them as a block candidate. If a blockchain candidate created by a miner adds up in the universal ledger, he is rewarded with bitcoin units.

How are Bitcoins mined?

Requirements for Creating an Ideal Block Candidate

To be recognized as a block, the block candidate must have certain features:

  • All transactions should be legitimate
  • It must have a block fingerprint
  • It is accessed by a miner by processing its hash value via the hash function
  • The fingerprint must be rare and below a threshold value
  • The block includes a nonce, which is scrambled data
  • The data is modified to obtain a hash value
  • If it is satisfactory, it is broadcast to the other miners who ratify it.

Every miner identifies a valid block candidate and adds it to his ledger. Finding the satisfactory block candidate with a legitimate hash value is proof of work. This is recognized by other miners who individually find the hash value of the block candidate. This is known as a consensus mechanism. Adding false data or transactions can label a block candidate as worthless. This is why only legitimate transactions are added to the block.

A miner gets the fee that every transaction gives, plus he can get 6.5 bitcoin if he adds a block to the ledger. The fee is awarded to the miner who adds the transaction to his ledger. If he deviates from the existing consensus, a fork is generated. It means generating a new type of cryptocurrency, such as Bitcoin SV. The value of these deviants depends on consensus.

This was a step-by-step process of how bitcoin works. Cryptocurrency critics believe that without any regularisation and liquid form of cryptocurrency, it can create a bubble. Its price hikes as per the demand; therefore, economists see it as a commodity.

If there is no demand, the prices will slump. However, only the future will decide what will become of cryptocurrency afterward.

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