Cryptocurrency is a vast subject with many underlying parts. However, once the basics are understood, the matter becomes easier to navigate and use. The first place to start is its origin.
In 2008, Bitcoin, the first and still most important cryptocurrency, was announced. Emerging as a side product of another invention, Satoshi Nakamoto never intended to invent a currency. However, in his announcement of Bitcoin, he claimed to have developed a “Peer-to-Peer Electronic Cash System.”
The most important part of this currency is the way it was built. As a decentralized digital cash system, the electronic cash system prevents double spending, is entirely transparent, and due to its decentralization, it has no central authority or server.
Rather than a central authority, cryptocurrencies use Peer-to-Peer networks for file sharing. Every peer in the system has a list of all transactions in which they can check if future purchases are valid or an attempt to double spend since there is no central server that keeps a record of the balances.
The difference between centralized and decentralized can be easily explained through an analogy on fruit. Let’s say that Rachel has a banana that she wants to give her friend Marsha. In a centralized system, Rachel would have to ask Marsha’s friend Amy for permission to give away her banana. Amy would then examine if Rachel had the banana or not, and then if proven that she did, Amy would allow Marsha to receive the banana. If you haven’t already guessed, Amy is the bank in this example. However, in a decentralized system, Rachel could simply give her banana to Marsha, and the blockchain would confirm that Rachel had the banana, thus taking out the human factor and providing more confidence in the process.
But wait! What exactly is blockchain? The blockchain is a cryptographically protected distributed ledger made up of blocks that contain transaction history. As the blockchain grows longer and longer, it becomes increasingly difficult to alter older transactions, as well as undeniably apparent. All-in-all, blockchain is essentially a decentralized database or ledger. Heres blockchain in a nutshell: A worldwide computer that is formed by lots of computers talking to each other.
When thought about, Bitcoin and cryptocurrencies like it are more of a currency than the balance number seen on a bank account. Those numbers are entries in a database that can be changed by people you don’t see and by rules you don’t know. Cryptocurrencies on the other hand work on a consensus-keeping process that is secured by strong cryptography. Rather than trusting people, cryptocurrency trusts math.