A quick guide: How do cryptocurrencies work?

January 14, 2022 09:04 AM AEDT | By Ashish

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A quick guide: How do cryptocurrencies work? — Image source: Michael,Shutterstock

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Highlights

A cryptocurrency is a digital payment system that uses a decentralised system to record transactions and issue new units.

Virtual currencies are stored in digital wallets.

Cryptocurrencies can be mined or purchased from cryptocurrency exchanges.

A cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions. The peer-to-peer system, which allows users to send and receive payments, doesn’t have a central issuing or regulatory authority. In fact, it uses a decentralised system to record transactions and issue new units.

When a person transfers cryptocurrency, the transactions get recorded in a public ledger. The virtual currency is stored in digital wallets. Cryptocurrencies can be mined or purchased from cryptocurrency exchanges.

A cryptocurrency uses encryption to verify transactions and hence the name. It involves advanced level of coding to store and transmit crypto data between wallets and public ledgers. Since cryptocurrency is secured by cryptography, it is nearly impossible to counterfeit the virtual currency. The primary aim of encryption is to establish a system of security for users.

Bitcoin was the first cryptocurrency, which was founded in the year 2009. It is the crypto with the highest market capitalisation till date. An anonymous person called Satoshi Nakamoto introduced it to the world via a white paper in 2008. Since then, thousands of cryptocurrencies have come to exist in the market.

Cryptocurrencies can be mined or purchased from cryptocurrency exchanges.

Source: © Aoutphoto | Megapixl.com

How does a cryptocurrency work?

Cryptocurrencies run on blockchain technology, which is essentially a set of connected blocks or an online ledger. Blockchain is a record of all transactions updated and held by each member of the network. Every new block which is generated must be verified by each node before being added. It makes it nearly impossible to forge transaction histories.

Meanwhile, the process by which cryptocurrencies are formed is known as mining. The process involves a computer to solve mathematical problems to generate virtual coins. The coins purchased from brokers can be stored and spent using cryptographic wallets.

Ethereum, Ripple and Litecoin are other popular cryptocurrencies.

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