Cryptocurrency 101 – Basic Overview for Newcomers On How Cryptocurrency Transactions Work

Cryptocurrency 101

If you have the feeling that the number of people that use cryptocurrency transactions is increasing and you are getting left behind, you are probably right. However, that doesn’t have to be the case. 

Cryptocurrencies might seem complicated at first, but once you understand the underlying concept behind all of them, things become much easier. Reading even a basic guide, such as the one here, can help you a lot in grasping how cryptocurrencies work.

What is more, if you follow the right people, you can keep up with the latest crypto developments and get some valuable tips too. To get the best and latest info on the cryptocurrency industry, check out some of the famous experts in the field that can be found here.

Understanding blockchain basics

To understand how cryptocurrency transactions work you first have to know some blockchain basics. Let’s start with the word itself. The compound noun blockchain consists of two parts ‘block’ and ‘chain’.

‘Block’ refers to the digital information shared and ‘chain’ is the public database where this digital information is stored. Blocks contain information about the transaction that you are making such as date, time, consensus rules and amount you have spent, just to name a few. 

Every computer or so called “nodes” in the blockchain network has a copy of the blockchain. This is why when people are talking about blockchain technology they say that it is a type of distributed ledger. Unlike transactions that involve a centralized bank or a clearing house, where there is one central processing authority, blockchain transactions go through a database shared by everyone in the network. All users are looking at the same blockchain and all have access to an identical copy of it.

Nodes talking to each other

You may have heard about nodes and how important they are in cryptocurrency transactions. If you don’t know what nodes are, don’t worry as this aspect of crypto transactions is quite simple.

Nodes are the computers in the blockchain network that communicate to each other. These computers use a peer-to-peer protocol to talk to each other and share information about individual transactions and blocks. 

The node you are using relays, but also validates transactions. Each node is constantly updated on all the latest transactions taking place in the block chain. This means that a person who is making cryptocurrency transactions is participating in a vibrant, efficient, and transparent environment. 

Decentralized network

Blockchain technology is completely decentralized. This means that the transactions that are made are not stored or processed by a central authority. If you are making transactions with conventional payment methods, they are always run through a clearing house or a central bank. This is not the case with cryptocurrency payments as the blockchain does not store any data in a centralized location. 

When a new block is added and a new transaction is made, the blockchain updates across all peer-to-peer clients and its updated copy is spread across the entire network. 

How transactions work?

When a cryptocurrency transaction takes place several things happen. First, you make your purchase at an online vendor that accepts your cryptocurrency. As soon as you have done this, your transaction is given certain identifying information. This includes data such as date, time, amount you have spent, and your digital signature. 

The next step is for the transaction to get the blockchain verification. Every transaction on the network goes to a special queue called mempool or memory pool. There it waits for special nodes called “miners” or “block producers” to collect certain amount of transactions.

After this has been completed, the transaction is stored in a block. Chances are that a single transaction will be grouped together with lots of other transactions in a single block as each individual block has a lot more space than an average transaction can take up.

The last step in this process is for the block to get a hash or a unique identifying code. The block gets its own hash and a hash of the most recent block in the system too. As soon as this is done, the block is added to the blockchain and it is publicly visible to all parties in the network. This means that the transaction is completed successfully.

What makes the network secure?

A shared blockchain network comes with lots of perks among these is security. As we just mentioned, as soon as the block is added to the blockchain, it gets its own hash code, but also gets the hash of the block that preceded it. 

This is very important when it comes to protecting the security of your cryptocurrency transactions as it discourages hackers from making you spend more than you wanted. If there is a person with fraudulent intentions wanting to change your transaction, he/she will have to go to impossible lengths to do that.

That person will have to change every single block in the blockchain as the hash codes connect each block with the one before it. It would take an incredible amount of computing power for this to happen and would make any crypto hacking completely impractical.

The hype bubble

The 2018 Bitcoin crash led many to believe that cryptocurrencies were just a ‘mirage’ as Warren Buffet once called them. However, the subsequent rise and increase in value of the most popular cryptocurrency proved most of these critics wrong.

As with all fast-growing industries and ideas, cryptocurrencies have always been subject to predictions of either an instant rise in value or doomsday crash scenarios. And while the second prediction has been true for some cryptocurrencies that were dubious to start with, most other digital coins have stood the test of time. 

Cryptocurrencies such as Bitcoin, Ethereum (Ether), and Litecoin are the preferred method of payment for millions of tech-savvy individuals that know what they are doing. To think that they would blindly believe the potential of a cryptocurrency without checking it many times over is silly to say the least.

In fact, the bubble lost a lot of people so much money because they had the wrong idea about what the internet can be used for. These were the wrong people, at the wrong place, in the wrong time. That’s definitely not the case with cryptocurrencies and the well-informed people that use them.

Cryptocurrency use cases

Cryptocurrencies can be used for a variety of things. You can use them as digital cash as most people do these days and buy various items online. Of course, you don’t have to spend all of that crypto. Trading algorithms have proven to be very effective when it comes to trading cryptocurrencies and can be used to increase your digital coins tally. 

Another thing that you can use them for is smart contract functionality. Very few blockchain networks support this functionality anyway so it comes naturally to make full use of it. This smart contract component is used to act out a certain contract-related action when contract conditions are met. 

Lastly, lending is another application of cryptocurrencies that is gaining popularity. The Ethereum network, for example, has very popular lending services such as Maker and Compound that enable people to use cryptocurrency as fiat loans collateral.

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