In recent years, many people have invested in cryptocurrencies. If you want to do it too, know that it is essential to know the material well before starting, because it is not thererisk-free investment. Through this article you will learn more about how cryptocurrencies work. Definition, means of transaction and underlying technology of cryptocurrencies – we tell you everything.
What is cryptocurrency?
Cryptocurrency is a digital currency based on blockchain technology to provide security, transparency and reliability of transactions. Cryptocurrencies don’t have a physical existence like fiat currencies. These currencies are also not legal tender and they are not regulated by any central bank or financial authority. The price of a cryptocurrency mainly depends on the demand for the asset in question. It is an alternative currency, totally virtual and its usefulness depends on the issuing body.
It is also possible to obtain cryptocurrencies through exchanges such as “coinhouses” which hold and protect these assets for you. If you are interested in investing in this type of digital asset, you can check the coinhouse reviews before you get started.
As stated above, in order to ensure the transparency, security and reliability of transactions, cryptocurrencies rely on an underlying technology called blockchain. It is a database distributed among the nodes of a computer network. Clearly, it is an information storage system spread across a multitude of computers. In this system, all contributors to the network have a copy of the database. This copy is updated simultaneously.
The difference between the blockchain and a traditional database is that it allows you to record data in the form of blocks. With a block, information is easily grouped. When the block is full, it is sealed with a computer code and is added to the previous block. Hence the name blockchain. Thanks to this way of structuring and recording information, this database is tamper-proof. The blockchain therefore allows the exchange of value in digital form, a value materialized by the cryptocurrency.
This technology is transparent, as it allows everyone to see the transactions that have taken place on the network. In general, the code of a blockchain is open source. Everyone can then consult it and suggest improvements. Furthermore, the security of blockchain technology initially lies in the fact that no participant in the network can modify it without others noticing. Furthermore, each block is closed by a hash function.
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To validate transactions on a blockchain, several transparent and secure methods can be used. Proof of work is the mechanism used on the Bitcoin network. This validation mechanism is powerful, but still consumes a lot of energy. Therefore, several alternative consensus mechanisms have been created.
Among the most commonly used mechanisms are the Proof of Stake method (PoS or proof of participation in French). With this method, network participants stake the cryptocurrency they own to validate transactions on the network. The right of validation is randomly granted by an IT protocol to one of the participants.
The greater the sum of the cryptocurrencies involved, the more likely you are to be chosen by the network to validate a transaction. The chosen network participant is rewarded with an amount of the relevant cryptocurrency, as in the case of the proof-of-work mechanism. And to participate in the validation of a decentralized network, you have to block your cryptocurrency on the protocol (staker). The participant can still decide, at any time, to unblock it to transfer or change it. However, it is important to remember that in order to move or hold your cryptocurrency, it is essential to have an electronic wallet.