A basic introduction to cryptocurrency
As you probably know, cryptocurrency is a digital currency. It works on Blockchain technology. It intends to allow anyone with an internet connection to buy goods and services online, invest or make payments. It was first created by Japanese computer scientist Satoshi Nakamoto who wrote a white paper on digital cryptocurrencies entitled “Bitcoin: A peer-to-peer electronic cash system.”
Cryptocurrency is a decentralised digital ledger and free from any third-party involvement. That means it’s currently not controlled by any government or bank. For that reason, a transaction can never fail. And as citizens have found bank transactions can fail with your everyday banking provider including:
- hacked accounts
- large transaction fees
- transaction limits
And crypto offers virtually no fees and 24/7 access to your money. There are no delays or extra charges for making international transfers either. Anyone can use it who has an internet connection.
How do you create an account?
You can create an account and set up your digital wallet (the digital wallet is the password to authorise transactions, not the unit holding your coins). There are a few Bitcoin wallet choices in New Zealand. We review them in later articles.
Crypto works on blockchain technology. Blockchain is a series of blocks that record transactions for example:
- who made the transaction and who it is going to (origin and destination)
- the amount of trade (the dollar amount)
The transaction then gets distributed across the entire blockchain network. The data is replicated and stored on each node (device in the network) across the entire Blockchain network. This makes it more secure and impossible to change, hack or cheat the system. Then it is verified by every validator node to proceed with the transaction. Nodes follow strict rules agreed upon by the community.
How does a transaction get onto the Blockchain?
When a transaction is requested (and authenticated), a block representing the transaction is created. The block is sent to every node. The node validates the transaction, and the transaction is complete. The update is distributed across the network and the block is added to the existing blockchain.
Why is it called cryptocurrency?
Cryptography is essentially cracking codes and is the mathematical and computational practice of encoding and decoding data. The term comes from the Greek word ‘Kryptos’ translating to ‘hidden.’ Cryptocurrency uses cryptography to secure its transactions. That means any messages you receive can only be read by you (completely independent of third parties). Encryption keys are the most important part of cryptography. They make any messages for an unauthorised recipient completely unreadable.