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Understanding Cryptocurrency & Blockchain – Frequently Asked Questions

Cryptocurrency is the latest buzzword doing the rounds of many technology publications and blogs. While Bitcoin is the most popularly known cryptocurrency there is a lot of confusion and misinformation surrounding it.

Cryptocurrency is money that has not been issued by any country but can be used for transactions anyway. Cryptocurrencies are frequently bought using fiat money like Dollars, Pounds, Euros etc. or by using other cryptocurrencies. There are specific exchanges that allow you to exchange fiat money for designated cryptocurrency and vice-versa.

Why are the Cryptocurrencies so popular

Cryptocurrencies are gaining popularity due to a wide variety of reasons. The foremost among those is that it makes transactions extremely simple and quick, at little to no cost. Unlike bank transactions which require fees, you could choose to use cryptocurrency to immediately pay someone in a different country even and without any transaction fees.

As an instrument of investment. As they are completely decentralized, you could theoretically store a chunk of your money in the form of cryptocurrencies, and then divest them at a time of your convenience. They neither depreciate like physical assets nor do they require any maintenance costs.

Cryptocurrencies also are expected to have a place in the upcoming IoT economy or as it is more popularly known, the machine economy. It is expected that smart machines around you will use cryptocurrencies as a means to carry out their functions without human intervention.

For example, the cleaning robot in your house will place an order for floor cleaner without any interference from your side and pay via cryptocurrency.

How Bitcoin or Cryptocurrency Works on Peer to Peer System Without Third-Party Intervention

o understand how Bitcoin works, it is necessary to understand how blockchain works. Every single transaction made in the network is recorded and encrypted. However, if somebody goes back and changes some data then it needs to be encrypted all over again and the answer will be different as compared to the original block.

It is computationally impossible to create a blockchain from the changed block that is long enough to match the true chain. What this means is the longest chain in a network is the true blockchain. Any other chains are effectively meaningless.

This is the primary means of security. Creating a fake trail of records is mathematically and computationally unfeasible.

If Alice wishes to send 1 Bitcoin to Bob, she makes the necessary entry into her wallet. The other people in the network check if her transaction is valid by ensuring that she has that one bitcoin to transfer. Once the transaction is validated, Bob’s ledger is updated to show that he has received 1 Bitcoin.

This solves the problem of double spending. Until the entry is made in Alice’s ledger that 1 Bitcoin has been subtracted, nothing will appear in Bob’s ledger.

Every single transaction follows this method of validation. Maintaining these rigorous records in the blockchain ensures that every single Bitcoin is tracked perfectly.

Bitcoin Regulation and Trading overview

Bitcoin Regulation is built into the system. The underlying mathematical structure of Bitcoin has made it so that only 21 million bitcoins can be mined and no more.

Even if governments start using Bitcoin as something akin to fiat currency, it is impossible for them to flood the market to cause a drop in prices.

As more and more Bitcoins are mined, it becomes harder and harder to mine more. In the early days of bitcoin, mining was easy. All you had to do was download the client and leave it running, and many people wound up with thousands of bitcoins. Nowadays, it takes a massive investment to mine Bitcoins. The amount of computing power required to mine a new bitcoin increases with each bitcoin mined

What is Hash Function in Cryptocurrency

The kind of encryption used in blockchain is called a hash function. Hash Function is one-way encryption without a key. What this means is, if, for example, you put the line “What is bitcoin mining?” through movable type’s SHA-256 cryptographic hash algorithm you get the hash value 724b3e1c2da8c82822f137f95f6373369d14c45396c58b754e29ca36c8250db4.

Now the interesting thing about hash functions is that any change in the original input causes a completely different hash value to be made. This randomness ensures that predicting the output is impossible.

So even if the input is “What is bitcoin mining”, the hash value changes to 7337ce9d8bfa81a71aacbe1da7f5b73a39dbcedb033712fb3d0bf5da737d2741. Despite the only change being the lack of a question mark, the hash value changes completely.

Why are Hash Functions necessary?

So what’s the point of having a Hash Function in blockchain? Well, it’s simple. One of the main ways blocks in the blockchain are validated is via proof of work. And the work involved is solving a cryptographic puzzle. The cryptographic puzzles have a particular format. The puzzles ask miners to find an input that gives a specific hash value starting with multiple zeros. This means that whatever is put into the Hash Function must return a result that starts with 00000.

There is no way to cheat this as the only way to solve these kinds of problems is by guessing randomly. Thousands of computers in the entire blockchain work tirelessly to find the exact input that will give the desired result. The first person to find the number closest to the exact input earns several Bitcoins.

Once the correct input is found, that particular block is sealed with that number. That number also acts as the proof of work. What the proof of work means is that people have dedicated computational power and energy towards solving that particular problem.

That number is then added to the next block in the blockchain, to prove the legitimacy of that chain. Like that, each successive block is stamped with the sealing number of the preceding block, creating an unbroken chain all the way back to the Genesis block, the first block of bitcoin ever mined.

Categories: Cryptocurrency
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