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What is Cryptocurrency?
Cryptocurrency is a digital currency which works as an exchange that uses cryptography to secure its transactions and to control its generation. Unlike fiat currency, cryptocurrency is not regulated or controlled by any bank, government or centralized financial authorities.
The problem with a centralized network in a payment system is the so-called “double spending”. Double spending happens when one entity spends the same amount twice. For instance, when you purchase things online, you have to incur unnecessary and expensive transaction fees. Usually, this is done by a central server(Bank) that keeps track of your balances.
The heart of cryptocurrency lies in blockchain technology. As of right now, most of the digital transaction is carried out by a trusted middleman(Bank). Blockchain connects consumer and suppliers directly removing the third party. Blockchain uses cryptography to keep exchanges secure, providing a decentralized database or digital ledger. Digital ledger contains a database of transactions that everyone on the network can see. A network is a group of computers that all must approve an exchange before it can be recorded and verified. Blockchain stores every detail of transaction of digital currency, essentially making it impossible to spend same currency twice.
How does it work?
- Let’s say A wants to send money to B.
- Transactions are represented online as a ‘block’.
- The block is broadcast to every party (Peer-to-peer network consisting of a group of computers, known as ‘nodes’) in the network.
- Those in the network approve the transaction is valid.
- The block then can be added to the chain, in a way that is permanent and unalterable.
- Money moves from A to B.
Consider blockchain as a spreadsheet that has thousands of duplicates across the network of computers, which is updated regularly. The database is not stored in any single location, keeping it truly public and easily verifiable.