Available on how cryptocurrencies work

Published on November 06, 2017

Available on how cryptocurrencies work

Original author: Jincor Team
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At first we paid for a cup of coffee . Then they bought plane tickets . A little later - paid for training . Now, by the principle of crowdfunding, we are collecting huge sums for incredible inventions and projects. All of the above unites the fact that payments were made not with ordinary money, but with the help of cryptocurrencies, whose technology is believed to change the world. But how do cryptocurrencies work and how do they differ from other payment methods and the same electronic money? This article will provide answers to these and some other questions.

How it works: anatomy of cryptocurrency


Cryptocurrencies are a type of alternative currency. Unlike multiple electronic money and financial instruments, cryptocurrencies are decentralized, which means that they are not controlled by any government or organization. Cryptocurrencies are also a peer-to-peer tool (P2P), which allows individual users to buy and sell products to each other directly, without the mediation of third-party organizations, such as, for example, large banks. Some cryptocurrencies are anonymous, but this is not their common feature.

If we consider the basic cryptocurrencies, we find that they are all united by a set of basic technologies and concepts that allow you to take responsibility (that is, to organize payment services, - Ed.) And track transactions between banks and users.

Blockchain


When you make a bank transfer (or any transaction, - ed.), Your issuing bank does not actually immediately take money from your account and does not transfer it to the recipient's account. The bank simply stores the payment information in its database for as long as it needs and is convenient. Only the balance in your bank account and, possibly, the recipient’s balance instantly changes. Money is now moving on the principle of changing records in databases, and not physically.

In order for a cryptocurrency to function independently of any centralized intermediary, all participants in the process need to have a way to record and store financial transactions in order to eliminate the double write-off problem that allows you to pay twice with the same cryptographic token, that is, to “buy” goods for twice greater than the available amount. In this case, the problem should be solved without using some kind of central server and base, as is done in banks.

In most existing cryptocurrencies, an open cryptographically protected distributed transaction registry is used, which is called a “blockchain” - a “block chain”. A blockchain is a chain of blocks with transaction records that are interconnected and protected using cryptography. In addition, each block contains its own unique cryptographic identifier, which indicates (links) it with the previous block of the chain.

After adding to the blockchain, the blocks can no longer be changed without losing data on the entire subsequent chain, which immediately lets other users know that outside interference was made in circumventing the rules. This makes it possible to simply refuse to use the modified version of the chain (because without recognition of the modified block by the majority of the process participants it is useless) and continue to work with the original branch.

Electronic cryptocurrency wallets can be tied to the blockchain to ensure that their balance corresponds to reality, and new transactions are checked using data in a block chain to ensure that each of them is real and was made by a cryptocurrency that actually belongs to the payer (or his wallet).

Mining


In order to reach a consensus on which blocks of transactions should really be added to the block chain and in order to tritely create these data blocks, some users participate in the so-called mining process (from English mining - mining (ore), mining. understand that in order to use a cryptocurrency, it is not necessary to “mine”, - ed.

These so-called miners with the help of the computing power of their equipment perform more and more complex mathematical calculations in order to “prove the work done”. Proof-of-work (proof of work) is one of the forms of economic regulation of the blockchain. It was invented in order to prevent various attacks using computational power, such as fake entries, transaction failures, spam, and so on.

Since effective mining is now extremely expensive (if we are talking about “basic” cryptocurrencies, for example, Bitcoin), an individual cannot start adding his own blocks to bypass the rules without the approval of the entire network. The rest simply do not recognize them as real. Global changes are possible only at a concentration of 51% of computing power, which will only lead to the creation of a new “branch” of blocks - the so-called fork. In fact, this has happened more than once since the technology is almost ten years old. At the same time, the fork-branch is not compatible with the original one, but it can develop in parallel.

Wallets


Unlike money we are used to, cryptocurrencies are not stored in bank accounts we are used to. Instead, users of cryptocurrencies use special software and / or hardware wallets. Each such wallet contains a unique cryptographic key that allows the holder to get access to his savings, which are stored in the framework of the public blockchain.

At the same time, wallets can be as “hot” - that is, placed somewhere on the Internet as part of an online service (for example, coinbase or Xapo) and “cold” - cryptocurrency is stored without access to the network. A “cold” wallet, in fact, is a file on a computer, the loss of which will result in the irretrievable loss of access to the wallet and cryptocurrency inside it. In this case, the file can be placed in any storage: on the hard disk, removable media, and some startups even offer to buy a physical wallet-keychain, access to which is additionally protected by a user PIN code.



How to use cryptocurrency


The first decentralized cryptocurrency was Bitcoin, which is now the most widely used and most famous cryptographic token in the world. Bitcoin was created in early 2009. It was then that the author - someone under the pseudonym Satoshi Nakamoto - launched the network and the first bitcoin wallets. Some are counting the moment of the creation of Bitcoin since the publication of Satoshi’s Bitcoin manifest in October 2008, in which this anonymous author described the basic principle of operation and regulation of a decentralized network. Who exactly created Bitcoin is still unknown. The author did not disclose his real data and separated himself from the work on the project in 2010, leaving one million Bitcoins on his wallet. It has not yet been possible to find it; payments from the wallet are not made.

Bitcoin has continued to live its life and is now being adopted as an alternative method of payment by thousands of organizations and enterprises around the world. This list includes such companies and resources as Microsoft, WordPress, Reddit, Subway, Namecheap, Expedia, Newegg, Steam, Wikipedia, Zynga, Whole Foods, Bloomberg, Suntimes, Shopify. And this is only the beginning of an extremely long list.

Bitcoin is freely exchangeable for other cryptocurrencies or fiat (ordinary, issued by state banks - ed.) Currency. It also trades on specialized cryptocurrency exchanges, such as Bitfinex , Poloniex , Kraken , Coinbase or Bitstamp. All of these sites help users keep their cryptocurrencies, and some of them even offer convenient mobile wallets for wearable devices (smartphones, tablets) that can be linked to an account.

But Bitcoin is not the only cryptocurrency. Now on the market there are more than 1000 different cryptographic tokens , which, like Bitcoin, are based on blockchain technology. The total cryptocurrency market is estimated at $ 150 billion. Half of this capitalization falls on the first cryptocurrency - Bitcoin.

Why use cryptocurrency?


Due to their availability, immutability and low transaction fees and, potentially, high speed (along with anonymity, if necessary), cryptocurrency almost every day there are more and more new uses. In this case, we just have to find out what this technology is actually capable of.

With the emergence in this market of thousands of small enterprises, large corporations and entire countries, it is only a matter of time when cryptocurrency will become the new standard for financial transactions.

But even despite the fact that the advantages of using cryptocurrencies are obvious, there are still serious obstacles to their mass adoption. First of all, it is a low level of awareness and lack of understanding of the technology by the general public, the lack of regulatory documentation for cryptocurrency transactions and smart contracts, the fuzzy legal status of cryptocurrency, technical problems, etc.

In a number of countries, all these legal difficulties have already been partially resolved, but the technical complexity of integrating blockchain solutions and the lack of business-oriented products are still the main obstacles to the implementation of cryptocurrencies in the economic activities of businesses. The private blockchain, which is built by the Jincor team, will allow businesses of any size to easily get involved in cryptoeconomics without any legal, technical or operational difficulties, while cheaply, regardless of whether you plan to work in B2C or B2B markets.



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