Cryptocurrencies are digital, decentralized currencies that rely upon cryptographic principles for generation, distribution and transferring. Cryptocurrencies are a digital form of money that run on a totally new monetary system, one that is not regulated by any centralized authority or tracked by a formal institution.
For such a network to work effectively, every transaction should be done in a transparent and verifiable manner. This network is what is basically called the blockchain,this technology ensures that all cryptocurrencies are kept track of, regardless if they are being held in a digital wallet or being used in trading. At the center of the blockchain is the distributor called Ledger.
By definition, a distributed ledger is a held database that can be updated independently by any participant who is part of a larger network. Having a ledger forces everyone to “play fair” and takes away the risk of double spending. To perform a transaction on the distributable ledger, you will need a cryptocurrency wallet. This is, basically, like a normal wallet, but now digital and encrypted. A crypto wallet will have a public key and private key, which serves as your digital identity on the platform. Your public key is how you are identified by anyone on the platform, and it is what you can share with anyone who needs to send you crypto funds. But for you to perform any transactions on the distributable ledger (like sending or accessing your funds), you will need your private key.
It is these public and private keys that have seen cryptocurrencies labelled as being pseudonymous. A distributable ledger is open for all participants to see, and anyone can possibly see transactions between different wallet addresses. Digital currency is traceable: the transactions are public and permanently stored in the peer-to-peer network. You digital identity is not necessarily tied to your real-life identity. Still, you are not entirely anonymous, because the distributed ledger is open source, but rather pseudonymous, because no one can easily determine your personal identity by watching the transaction flow. With the absence of a trusted third party, distributed ledgers are based on a consensus between the parties involved in the transaction. The transaction is not confirmed until it goes through a verification process. When a consensus is reached, the public distributed ledger is updated and the transaction is recorded in the blockchain. But distributed ledgers were also designed to be immutable or unchangeable. To achieve this immutability, there has to be a verifying system. This is where cryptocurrency mining comes in.
On the distributed ledger, a collection of transactions is usually arranged into a ‘block’. Blocks are usually heavily encrypted, and they are turned into complex mathematical puzzles. The processing of solving those puzzles is what is known as mining. Cryptocurrency Mining is open source, so anyone can confirm a transaction, and the first miner to solve the problem gets to add a block to their transaction ledger. Whoever solves the puzzle, gets to append the block into the blockchain, and the miner is given a reward for their efforts. For example, if it is the Bitcoin blockchain, a miner will get rewarded in Bitcoins. This is, by design, how new cryptocurrency coins are created. Mining thus controls the speed at which coins are created (or the supply). By theory, with more supply, there is the threat of devaluation of the underlying coins. To prevent this, the puzzles are designed to get harder when more blocks are built.
But there is also another reason why mining is important. Mining ensures the accuracy and fidelity of transactions, which is imperative because once a transaction is added on the distributed ledger, it cannot be altered. This introduces the Proof of Work concept, which as the name suggests, is a system of validating work and proving that it is indeed correct. Miners commit a lot of computational resources to find the answers to the mathematical puzzles. With Proof of Work cryptocurrencies, the puzzles are designed to be hard to solve, but very easy to verify or prove that it is correct. It is this Proof of Work that validates a cryptocurrency coin or gives it value. But you will require hardware with huge computational power to increasingly solve harder puzzles, and this makes the process of mining expensive.
The Final Word
So, in summary, cryptocurrencies are basically digital coins that run on a distributed ledger system. They are produced by miners who have specialized hardware designed to solve mathematical puzzles before a transaction is verified and added on the distributed ledger where it now becomes immutable. The idea of work giving value to a cryptocurrency coin is what is known as the Proof of Work system. Cryptocoins will play an important role in the future, Main cryptos’ use is steadily increasing around the world. Understanding more about cryptocurrency is the first step. The second is to try it.