What are Cryptocurrencies?
Cryptocurrencies are digital currencies designed as an exchange medium. The difference from the money we use in everyday life is that it is digital and we can exchange digital information with a transaction. Cryptography is used to control the creation of new units of a particular cryptocurrency and to guarantee and verify transactions. In fact, cryptocurrencies are limited inputs that no one can change in a database unless it is a special case.
During the technology explosion of the 90’s, numerous attempts such as Flooz, Beenz and DigiCash have been made to create digital currencies, but inevitably unsuccessful systems. There were many reasons for their failure such as fraud, financial problems, and the conflict between the employees of the company and the bosses.
In particular, all of these systems used a trusted third-party approach, indicating that the companies behind them facilitate and verify transactions. Due to the failure of these companies, the creation of the digital currency system was seen as the cause of a loss for a long time.
The first cryptocurrency is Bitcoin
Later, at the beginning of 2009, an anonymous programmer or group nicknamed Satoshi Nakamoto announced “Bitcoin”. Satoshi introduced Bitcoin as “peer-to-peer electronic cash system”. There is no such center; that is, there is no server or central control authority. The concept is very similar to networks that share files.
One of the major problems that any payment network needs to solve is spending twice. This is a tricky technique of spending twice the same amount. The traditional solution was a reliable third party, a central server that kept the balances and transactions records. However, this method always includes all your personal information and is basically authorized to control your capital.
In a decentralized network such as Bitcoin, each participant must do this work, rather than any center. All these transactions, which are connected to the network and are accessible to everyone, are made publicly available through the ledger. So everybody can see the credit on every account.
Each transaction is a file consisting of the public key of the sender and recipient and the amounts of digital funds transferred. Also, the process has to be signed by the sender with its private key. All of these is a simple form of cryptography. As a result, the process is published on the network, but must first be approved.
In a network of cryptocurrency, only miners can verify transactions by solving these cryptographic puzzles. They perform transactions, mark them legitimate, and propagate them over the network. They then add each node of the network to the databases. After the transaction is confirmed, the miners receive the transaction fees as a reward.
In fact, any cryptographic network is based on consensus to ensure certainty of the attitudes and behaviors of all participants. If the nodes in the network do not agree on a single balance, the system will break off from the base. There are many pre-established and network-programmed rules that prevent this from happening.
These digital currencies are called cryptocurrencies as it forms the process of providing a consensus with strong cryptography. In addition, besides the factors above, this cryptography gives users confidence.