The basics of cryptocurrency and how it works

In the times we live in, technology has made incredible progress compared to any time in the past. This evolution has redefined human life in almost every aspect. In fact, this evolution is an ongoing process and thus, human life on earth is constantly improving day by day. One of the latest additions to this aspect is cryptocurrency.

Cryptocurrency is nothing but digital currency, designed to impose security and anonymity in online financial transactions. It uses cryptographic encryption to generate coins and verify transactions. New coins are created by a process called mining, where transactions are recorded in a public ledger, called the transaction block chain.

A little backtrack

The evolution of cryptocurrency is mainly attributed to the virtual world of the web and involves the process of converting clear information into a code, which is almost irresistible. Hence, tracking purchases and transfers involving currency becomes easy. Cryptography, since its WWII introduction to secure communications, has evolved into this digital age, blending mathematical theory and computer science. Thus, it is now used to secure not only communications and information, but also money transfers across the virtual web.

How to use cryptocurrency

It is very easy to use this digital currency for common people. Just follow the steps given below:

  • You need a digital wallet (to store coins, of course)
  • Use wallets to create unique public addresses (this enables you to receive coins)
  • Use public addresses to transfer funds in or out of the wallet

Cryptocurrency Wallet

A cryptocurrency wallet is nothing but a software program, capable of storing both private and public keys. In addition to this, it can also communicate with different blockchains, so that users can send and receive digital currencies and keep track of their balances.

How Digital Wallets Work

Unlike conventional wallets that we carry in our pockets, digital wallets do not store currency. In fact, the concept of blockchain is so smartly blended with cryptocurrency that coins are never stored in a fixed location. Nor do they exist anywhere in hard cash or physical form. Only records of your transactions are stored on the blockchain and nothing else.

Real life example

Suppose a friend sends you some digital currency, say in the form of Bitcoin. What this friend does is he transfers ownership of the coins to your wallet address. Now, when you want to use that money, you have unlocked the fund.

To unlock the fund, you need to match your wallet’s private key with the public address where the coins are allocated. Only when both these private and public addresses match, your account will be credited and your wallet balance will be inflated. At the same time, the balance of the sender of the digital currency will decrease. In transactions involving digital currencies, the actual exchange of physical currency never takes place.

Understanding cryptocurrency addresses

By nature, it is a public address with a unique string of characters. It enables the user or owner of a digital wallet to receive cryptocurrency from others. Each public address that is created has a corresponding private address. This automatically matches or establishes ownership of a public address. As a more practical analogy, you can think of a public cryptocurrency address as your email address to which others can send emails. Email is the currency people send you.

Understanding the latest version of technology, in the form of cryptocurrency, is not difficult. One needs to spend a little interest and time on the net to clear the basics.