The science behind cryptocurrencies
Cryptocurrencies have hit the mainstream hard, and the craze doesn’t seem to be going away soon. Notably, countries like El Salvador now recognize bitcoin as a legal tender and cities like New York are working to transform into crypto havens.
While only 16% of Americans claim to have invested, used or traded with cryptocurrency, over 90% have heard about digital currencies. Advocates for digital currencies and decentralized finance argue that cryptocurrencies are anonymous, transparent and secure – all good things.
The key behind this vision is the digital technology widely known as the blockchain. The blockchain is a public ledger or a virtual hall of records that records every transaction, including the sender and receiver’s crypto wallet address as well as the amount.
The basics of cryptocurrency explained
All cryptocurrencies, including bitcoin, are based on computer programs, meaning they aren’t physical. They’re basically computer code clippings that transfer value from one user to the other. To participate in the process, you need to create a digital wallet that acts like your virtual bank account. That’s essentially the address you’ll use if you want to transact with the top crypto poker sites or transfer funds to any address.
When you create a new crypto wallet, the cryptocurrency algorithm will generate a private key with a public address associated with it. This public key is like your bank account number, as it essentially proves your ownership. Normally, these addresses only acknowledge the type of crypto asset associated with them. However, cross-chain bridges can help link different crypto assets.
When transacting using crypto, the blockchain organizes the information added to the ledgers in groups of data (blocks). Every block houses a specific amount of data, so new blocks will be continually added to form a chain.
Every block has unique identifiers called Cryptographic “hash,” which protects the information in it from unauthorized access without a specific code. The hash also protects the information block’s place on the chain, helping to identify the previous block. This cryptographic hash is essentially a set of numbers and letters that can be up to 64 digits long.
Once the transaction information is encrypted and added to the blockchain, it’s permanent and immutable. Every node has a unique record of the timeline of your data along the blockchain. If someone hacked or tampered with the data or computer for malicious intentions, it won’t alter the information in the other nodes.
The system works in a way that it’s almost impossible to replicate the computing power needed to reverse engineer the process and figure out what is in those hashes.
How it works
Here’s how the blockchain is used in recording and verifying bitcoin transactions.
- A consumer buys Ethereum, bitcoin or any other crypto.
- The transaction information is sent across the crypto’s decentralized network of nodes.
- The nodes validate the transaction
- After approval, your transaction is grouped in a block. The block is then added to a growing chain of transactions.
- The complete information block is encrypted, and the record is permanent. It can’t be altered or removed on the blockchain.