Cryptocurrency is a virtual currency acting as a means to exchange or transact using cryptography so as to make it secure and to control the creation, the use of the creation and the limit up-till which the currency could be made available. A cryptocurrency is difficult to counterfeit because of this security feature. With not being issued by a central authority, cryptocurrency is immune from any government manipulation, or tampering of any kind. And with the use of cryptographic hash functions made sure to keep user data private. Let’s take a deeper look into this world of hashes, mining and see if it’s all chuckles and giggles or whether it has a dark side too!
The idea of an electronic cash system has been since the late nineties and with both centralized and decentralized network acting as the idea for the means of transacting. After seeing all the failed attempts at the creation of a centralized network, Satoshi Nakamoto, an individual or a group, in an attempt to create a peer to peer electronic cash system based on the decentralized network of exchange. Here, in a decentralized network, unlike the centralized, there is no central hub or a central server keeping track of all the transactions, the accounts or all the balances. This makes every single entity connected on the network to do that. Every peer in the network needs to have a list with all transactions to check if future transactions are valid or an attempt to double spend. And with all those entities connected to the network, maintaining a consensus without any central government verifying the legality of that transaction and the order in which the all the previous transactions occurred, stymied the job. Tackling this was what made possible the answers to multiple problems.
To explain the answer, I’ll give an example. Just imagine four men trying to find the cost of excavating a volume of land for the foundation work of a building. Since all the constraints are same for all four if the dimensions of the land and the cost of labor is same. Now one of them happens to own an excavator and to gain a profit on the job, he inflates the price. Now seeing all the estimates, the culprit’s discrepancy would be caught and rectified. Usually, an estimate is of multiple pages made into a file. Let’s call it as a block. With each work following one after other, these multiple estimate blocks could be stacked one after the other, making it a chain of blocks or a blockchain.
Now, a blockchain is a shared ledger, which keeps all the history of transactions, which cannot be altered. In a blockchain, as a transaction occurs it is put into a block, which is connected to a preceding block and the one after it. Transactions are blocked together adding them to a chain of irreversible blocks. See, multiple people can record the same transaction in a different manner, like on a restaurant ordering system, for example, one waiter likes to record the drinks first, then maybe dessert, then the main course, other might do it a different sequence. Well technically each order place is correct but the restaurant can accept only one of them a proper transaction. The same happens in the bitcoin blockchain. See, for transacting in a bitcoin network, you need to declare three things, being the account number, the account number of the person you are sending to and the number of bitcoins being sent. And all of the peers keeping a record of the transactions will add the transaction you made to the current block. Now, to answer the initial question, bitcoins stay safe thanks to keys that are basically chunks of information to a make a mathematical guarantee of any use of the bitcoin. On creating an account on the bitcoin network, it provides you both a unique private key and a unique public key. The private key, as you know, could be used to mark any data, also known as signing it, and can be sent across the network to the receiver. Now the public key is what the peers on the network could use as a proof of the marked private key to verify the transaction and add to the blockchain. And unlike, the signature in a bank transaction the mark or the stamp of the private key and verifying public key cannot be faked by a scam artist.
So with all that I have said, there are few things that still need to be unfolded in front of you. In bitcoin, every transaction that occurs needs to be verified and the act of verifying is done by solving math problems. See, for adding any ledger or block to the chain, each peer who keeps a record of the transaction, he or she must solve a math problem created by a cryptographic hash function, and only after solving this math problem can the transaction be verified and added to the chain. But wait, what kind of a problem is it. Here the cryptographic hash function takes an input, usually a message, and outputs an alphanumeric string.
These hash functions are easy enough so as to create an output but difficult when the output is backtracked to find the value of the input. Now, the hash function used by bitcoin is called SHA 256 which stands for Secure Hash Algorithm 256-bit. See, in a decentralized network, it is necessary that no single party abuses the power of bitcoin, as there was no authoritarian power to keep a check on it as opposed to the centralized one. So, it was incorporated in the system that these ledger keepers, also known as miners to devote some time to find the cryptographic hash, solve and then add to the chain. These SHA 256 hash function on an average needs about 1 minutes to answer the output, with the specially designed computers that could actually solve it. And with every correct output, the bitcoin network adds about 12.5 newly created bitcoins to the miner’s account as a reward along with a part which could be as small as 0.0000001 bitcoin is added along as tips. But wait, that means with the current rate of a bitcoin approximately $3886 or 2,47,570 rupees, a miner could earn $48,575, with each ledger the miner adds up to the blockchain. Well, every bitcoin that exists was intended for these miners, there is a limit or a milestone where the value of the reward gets half, which recently happened from 25 bitcoins to 12.5. And the goal was when the limits would be reached to a point where the reward for a transaction becomes too low to be even considered then the system would be feasible to run on just tips.
So, just like a commodity its price is predicted to further rise but should all of us invest our money in it. No, I mean not entirely. See, bitcoins are volatile money and analysts across the glove see it deemed to fail but having a small unit now, may someday like a stock would rise up.
Well, that was bitcoin, I know I have focused a lot of attention towards and was because most others are derived entirely or to some extent from it. Etherium, for example, is a brainchild of Vitalik Buterin is the second on the list of most frequently used cryptocurrency, with adding processing complex contracts along with the transactions. Then, there was Litecoin, which was like a younger brother to bitcoin, boasting a new mining algorithm and a larger amount of tokens. Even though it failed to find a real-world application, it is vastly hoarded as a backup and shared in case of the failure of bitcoin.
So, with all this, let’s take a look at its future. Cryptocurrency is a step towards the alternative to the banking system where is none’s a bearer to any sum of money. As no one can prohibit you from transacting in it or can change your transaction once it’s done, it has a set path free from any government hindrance, making it free from any inflation or deflation of government currency and they can be traded as real money. With new cryptocurrencies emerging every day opening doors to newer possibilities with early adopters getting wealthy and many losing its value only after a few months, its necessary to keep a check on these.