By now, most people have heard the word ‘Bitcoin’; however, they do not know what it is or how it works.
For those without any essential knowledge or experience, ‘cryptocurrency’, ‘Bitcoin’, ‘blockchain technology’, all refer to the same thing- something which is in trend right now but you don’t quite understand it. In simple words, Bitcoin is a type of cryptocurrency. Cryptocurrencies are digital/virtual currency designed to work as a medium of exchange.
What is blockchain?
Blockchain technology is the backbone of cryptocurrency and Bitcoin. A blockchain is a continuously growing list of records (blocks) which are linked and secured using cryptography. It starts with a network of computers (nodes). All the users in the network contribution to information held in the blockchain.
When a transaction happens, it is broadcast along the whole network and each user updates its own record independently. The official record is agreed upon by network consensus. Blockchain is a completely decentralized technology. It is hosted on millions of computers simultaneously. The information held on this platform is public and instantly verifiable. It is incorruptible as there is no centralized version of this information to hack or lose.
In the digital world, trust is all about providing authentication and authorization. His means you need to prove who you are and that you’re allowed to do what you’re doing.
However, by itself this isn’t that special. Blockchain has no central authority, because every node in the network is also an ‘administrator’ of the blockchain. To authorize transactions, the network applies the rules upon which it was designed. Preset protocol rather than a central authority is in charge of the ledger.
What is Cryptocurrency?
People had been trying and failing to make digital currencies work since 1990s. A major problem in the evolution of digital currency was to prevent people spending the same money twice. Earlier, digital currency relied on a central authority to maintain the ledger of transactions and to prevent double spending. However, as we have already seen, there is no need for a third-party system with the blockchain technology. Every user keeps their own record of balances. With cryptocurrencies, the trust is provided by “authentication” and “authorization”. The database is secured by big numbers and heavy cryptography.
How does Cryptocurrency get its value?
Just like any other currency, from the US dollar to the money in your Paypal account, currency primarily has value because we all agree it has value. Meanwhile, secondary factors include: a limited supply, a demand for it, use-value in an economy that accepts it in terms of exchange-value, because there is work behind it, etc.
The same is true for cryptocurrency. It has little inherent use-value, with the same being true for bank credit in a bank account, but it none-the-less has value in the modern economy.
We agree it has value (for whatever set of reasons), thus it can be traded for other things with value (such as real world goods and services). With that in mind, although it is like centrally-backed state-issued fiat currencies in many ways, there are notable differences. The main differences being it isn’t backed by a central government, it isn’t regulated by a central bank, and you can’t use it to pay your taxes (it isn’t legal tender).
Blockchain and cryptocurrency work together by sharing responsibility for administration across an entire network.