What is Cryptocurrency and how does it work?

What is Cryptocurrency and how does it work?
By alphacardprocess February 24, 2022

Cryptocurrency is a digital or virtual currency that uses cryptography for security. It is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature: it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.

Cryptocurrencies are an extremely hot topic right now. Bitcoin, the original cryptocurrency, has made astronomical gains so far this year (2017) and is already closing in on $5000 per Bitcoin. While Bitcoin grabbed the spotlight for much of last year due to its parabolic gains, other Cryptocurrencies like Ethereum, Dash and Litecoin have risen alongside Bitcoin. There are hundreds of cryptocurrencies available with more being released all the time, but here are a few of the popular ones…

Cryptocurrency is decentralized . It does not rely on any centralized system to ensure that payments are received or sent. Instead, Cryptocurrencies go around traditional payment methods by using blockchain technology . Each transaction is visible to everyone, but the individuals’ identities are protected by cryptography.

What is Cryptocurrency mining?

The “mining” process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The participant who first solves the puzzle gets to place the next block on the blockchain and claim the rewards. An example of such a puzzle would be to find a number (also called nonce) which when added to the data in the block and passed through a hash function, produces a result within a certain range. This is much harder than it sounds!

Cryptocurrency mining has become popular with the explosion of Cryptocurrencies due to extremely high up-front costs. Mining requires a large amount of computing power and time to solve the puzzle, but it is very unlikely that you will be able to do it on your own. Instead, Cryptocurrencies allow users to pool resources together and share their processing power over a network in order to solve these puzzles much faster.

To help illustrate this point, let’s use an example. We will give each person in the pool a power of 2 to help solve the puzzle, so 1 person would have the power of 2 while 3 people would have the power of 8. If we total up all powers in this example it adds up to 24, which is smaller than the number we are trying to find!

However if just one person has the power of 24, then it makes this much easier. The ‘miner’ that solves the puzzle gets to place the next block on the blockchain and claim the rewards, incentivizing people to mine in pools.

How Cryptocurrency mining works?

Mining is where you get rewarded for your efforts! You allow your computer’s hardware to be part of a mining pool. You are given smaller, easier blocks to solve but your computer does all the work. Your computer is trying billions of combinations until it finally finds the right code and wins the reward! The process happens on average every 10 minutes. This way you get rewarded for helping to maintain a decentralized blockchain network!

There are 3 main stages of mining:

  • Creation of a block (Proof of work)
  • Verification of the block (Proof of work)
  • Claiming your reward for your effort.