Pseudonymity: Owners of cryptocurrency keep their digital coins in an encrypted digital wallet. NOTE: Other systems like proof-of-work (such as proof-of-stake) are also used. Essentially, it’s similar to a difficult to solve “captcha” that requires lots of computing power. A proof-of-work scheme uses a hard-to-compute but easy-to-verify computational puzzle to limit exploitation of cryptocurrency mining. Proof-of-work: Most cryptocurrencies use a proof-of-work system. That means that developers can create APIs without paying a fee and anyone can use or join the network. Open Source: Cryptocurrencies are typically open source. Digital coins are stored in digital wallets and transferred digitally to other peoples’ digital wallets. There is no single entity that can affect the currency.ĭigital: Traditional forms of currency are defined by a physical object (USD existing as paper money and in its early years being backed by gold for example), but cryptocurrency is all digital. Cryptocurrency’s creation and transactions are open source, controlled by code, and rely on “peer-to-peer” networks. Other measures are included in digital coins to allow for adaptive scaling including limiting the supply over time (to create scarcity) and reducing the reward for mining as more total coins are mined.Ĭryptographic: Cryptocurrency uses a system of cryptography (AKA encryption) to control the creation of coins and to verify transactions.ĭecentralized: Most currencies in circulation are controlled by a centralized government so their creation can be regulated by a third party. However, if it takes 15 days for the network to mine 2016 blocks, that shows that it’s too hard to mind, so the difficulty decreases. So if it only took 13 days for the network to mine 2016 blocks, that means it’s too easy to mine, so the difficulty increases. The algorithm adjusts after every 2016 blocks (theoretically, that’s every two weeks) to get easier or harder based on how long it took for those 2016 blocks to be mined. The mining process is what gives value to the coins and is known as a proof-of-work system.Īdaptive Scaling Example: Bitcoin is programmed to allow for one transaction block to be mined approximately every ten minutes. Once a block is added to the ledger, all correlating transactions are permanent, and they add a small transaction fee to the miner’s wallet (along with newly created coins). The way in which transactions, blocks, and the public blockchain ledger work together ensure that no one individual can easily add or change a block at will. The first “miner” to solve the puzzle adds a “block” of transactions to the ledger. Mining is open source so that anyone can confirm the transaction. To add a transaction to the ledger, the “miner” must solve an increasingly-complex computational problem (like a mathematical puzzle). Mining: Mining is the process of confirming transactions and adding them to a public ledger. Mining confirms the transactions and adds them to the public ledger. The confirmation process takes a bit of time (ten minutes for bitcoin) while “miners” mine. The signature is an encrypted piece of data called a cryptographic signature and it provides a mathematical proof that the transaction came from the owner of the wallet. Wallets use an encrypted electronic signature when a transaction is made. That transaction gets submitted to a public ledger and awaits confirmation. Transactions: A transfer of funds between two digital wallets is called a transaction. Bitcoin calls this public ledger a “ transaction block chain.” Also, new transactions can be checked to ensure that each transaction uses only coins currently owned by the spender. The ledger ensures that corresponding “digital wallets” can calculate an accurate spendable balance. The identities of the coin owners are encrypted, and the system uses other cryptographic techniques to ensure the legitimacy of record keeping. Public Ledgers: All confirmed transactions from the start of a cryptocurrency’s creation are stored in a public ledger. To understand how cryptocurrency works, you’ll need to learn a few basic concepts.
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