Understanding How Cryptocurrency and Blockchain Work

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The term ‘Blockchain’ is actually, a combination of two words – Block (i.e. list of digital records), and Chain (which is cryptographic links connected together).

In other words, blockchain is list of digital blocks that are chained together using cryptographic nodes, right?

I guess you are still very confused as it is right now, but this post will help you in understanding blockchain and how it works. You will also see its connection with cryptocurrencies.

In financial industry, unlike the blockchain development today, there are lots of middlemen (e.g. payment processors, banks, and credit cards companies etc).

Intermediaries like these, are institutions that help to establish trust between crypto traders like; buyers and sellers, where-by ensuring accurate transactions.

These are the major reason why cost of transactions tends to be costly or cheap depending on speed.

So let’s enter the cryptocurrency basics to learn blockchain already!

What is blockchain technology?

Blockchaintech Blockchain simply eliminates the need for middlemen by providing a decentralized, trust-less ledger system with little, or no exposure to fraudulent activities.

This also helps in making transactions faster by simply removing financial institution protocols. That’s to say, blockchain transactions occurs without the financial institutions getting involved directly, or indirectly.

It can be known to be called more like a peer-to-peer transactions, without any kind of third-party.

Althoug, blockchain explained, it’s commonly used in connection with bitcoin transactions to state the progress of transfers made. And it is also used by some companies to disrupt huge data, supply of chain to gamblers and the internet.

Blockchain Explained: How does it work?

Now you may be thinking there’s something like a blockchain app – but NO! Blockchain is not an app, but it’s like group of networked nodes connected together. And it has its own paths of links for specific transactions.

Cryptographic Nodes

These are large network of computers that runs the blockchain. They validate and keep records of all transactions by solving complex mathematical algorithms. Blockchain Featured

Now, each of the nodes has a complete history of all transactions, which means, no one can change any data without letting the whole systems know (or they will definitely reject the change instantly).

Benefits of blockchain development

1. Fast Transactions: It is very fast because already it has cut out the middlemen that tends to delay most financial transactions, and validation are even inbuilt into the systems.

2. Cost effective: Blockchain is very cheap compared to what middlemen charge to move finance between financial institutions.

3. Privacy: It is secured to the extent that transaction details only remains within the nodes in the networked systems and cannot be seen by humans.

Status of “money” and virtual currencies

The nature of “money” of decentralized cryptocurrency is to be questioned.

Money is traditionally identified with three functions:

  • Money as a means of exchange;
  • Money as a unit of account;
  • Money as a store of value.

Fiat money vs Virtual currency vs Cryptocurrency

Fiat money

Fiat money is a currency that a government has declared to be legal tender, but not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand, rather than from the value of the material that the money is made of.

Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy.

Fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation’s paper currency, like the U.S. dollar bill, the money will no longer hold any value.

Virtual currency

In the process of trying to define “virtual currencies,” we run into several problems. The problem becomes all the more evident when considering that a “currency” essentially requires a statutory definition.

Virtual currencies, however, lack a normative definition. From the “synthesis” of this syllogism, we can easily deduce that virtual currencies are not actually “currencies” because of the legal vacuum surrounding them.

This makes them both extremely attractive and dangerous as they’re still in the “legal gray zone”. This absence of clear regulation, however, does not mean that they are not being closely monitored by regulatory agencies around the world.

Virtual currencies have traditionally been classified according to their relationship with “real money” and the “real economy”, taking into account how the money flows between virtual currencies and real currencies works, and they are converted and used to purchase real goods and services.

According to these characteristics, the existing virtual currency schemes have been divided into…

  1. Closed virtual currency schemes (that have scarce, if any, interaction with the real economy; e.g. currencies used for online games);
  2. Virtual currency schemes with unidirectional flow (that implies an irreversible conversion at a specific exchange rate from the “real currency” to the “virtual currency” that can then be used both to buy virtual and real goods and services; e.g. “credits”, “vouchers”, “points” or other “bonus” systems);
  3. Virtual currency schemes with a bidirectional flow (virtual currencies can be bought and sold according to exchange rates with real currencies and can also be used to purchase both virtual and real goods and services; e.g. Bitcoins).

However, the virtual currencies that are most interesting to the watchful eye of the regulators are Bitcoin, Ethereum, Litecoin, Dogecoin (A satirical meme created with the sole intention of trolling the “crypto investors”), and other top-ranking crypto-coins in the market.

Cryptocurrency

Since we (me and you), have fully discussed and learned about blockchain in detail. Let’s go ahead, and learn everything concerning cryptocurrency. There is no way you will talk about blockchain without talking about cryptocurrencies.

In other words, this will be a fully detailed cryptocurrency for dummies guide. After reading this guide, you will have no need to ask about what it really mean, because i am going to let you know everything and what it really mean in detail. Let’s get started!

What is cryptocurrency?

A cryptocurrency is a form of virtual currency that uses encryption techniques as means of securing the verification of transactions. It can be centralized and decentralized, depending on the method of issuance of currency.

It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency.

How cryptocurrency works

Cryptocurrency does not need bank, third-party or any other financial institution to be transacted. User can simply transfer or trade cryptocurrencies between each online freely, and even without trusting each other with their financial information.

Cryptocurrencies do this by recording every transaction (like the one above between Peter and Paul) on a shared database called a blockchain.

Cryptocurrency basics

There are many kinds of cryptocurrency, but all of them has these things in common. Every cryptocurrency must be aimed at these things below:

Digital

Cryptocurrencies are digital money (or digital currencies), which means that, it only exists in computers. Cryptocurrencies don’t have physical coins or paper notes just like the popular fiat money.

Peer-to-peer

A cryptocurrency can only be passed from person to person digitally. You don’t need to pass it through any financial institution to get it through to the person you are transferring it to.

Global

A cryptocurrency is the same in every country, and this is to say that, they can be used freely between countries and across borders.

Encrypted

This is where we get the crypto part of the cryptocurrency definition. Crypto is Latin for hidden. So, cryptocurrency translates as hidden money.

Decentralized

In cryptocurrency world, everyone is in charge of their own money, it isn’t kept in a bank. A bank is a centre, where lots of people keep money. Cryptocurrencies are not managed by a central server, that’s why we say they are decentralized.

Trust-less

The way cryptocurrencies are built means that you don’t have to trust anyone in the system in order for it to work.

Bottom-line

There it is – that’s cryptocurrency basics and blockchain explained. Hopefully now you’ve got a solid grasp on what blockchain is, why everyone’s talking about it, and how it can impact your small business.

Whether or not you decide to accept Bitcoin as a form of payment depends on your understanding and what the business in question needs.


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Disclaimer: Being a cryptopreneur does not mean am also a qualified investment adviser, and may not have a vested interest in some projects, or businesses mentioned here. None of the content(s) on this blog is a licensed investment advice, nor is it an advice replacement from a certified financial planner.