What is Cryptocurrency and How it works

by Fahad Mahar

What is Cryptocurrency and How it works

A cryptocurrency, cryptocurrency, or crypto is a digital currency designed to function as a medium of exchange over a computer network maintained or maintained by a central authority, such as a government or bank. It is a decentralized system for verifying that parties to a transaction have the money they claim, eliminating the need for traditional intermediaries. , such as a bank, when transferring funds between two institutions.

Ownership records of individual coins are stored in a digital ledger, a computerized database used to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership. Strong cryptography is used. Despite their name, cryptocurrencies are not considered currencies in the traditional sense, and while various treatments have been applied to them, including commodities, Classified as securities, and currencies, cryptocurrencies are generally viewed as a separate asset class in practice. Some crypto schemes use validators to hold the cryptocurrency. do In a proof-of-stake model, owners offer their tokens as collateral. In return, they get rights to the token in proportion to the amount of the stake. Typically, these token stakes acquire additional ownership in tokens over time through network fees, newly minted tokens, or other such reward mechanisms.

Cryptocurrency does not exist in physical form (like paper money) and is usually not issued by a central authority. Unlike central bank digital currency (CBDC), cryptocurrencies typically use decentralized control. When a cryptocurrency is developed, or created before being issued, or by a single issuer. is issued by, then it is generally considered central. When implemented with decentralized control, each cryptocurrency operates through distributed ledger technology, typically a blockchain, which serves as a database of public finance transactions. Traditional Asset classes such as currencies, commodities, and stocks, as well as macroeconomic factors, have modest exposure to cryptocurrency returns.

The first decentralized cryptocurrency was Bitcoin, which was first released as open-source software in 2009. As of March 2022, there were more than 9,000 other cryptocurrencies in the marketplace, with more than 70 having a market capitalization of more than $1 billion.

Formal definition

According to Jan Lansky, a cryptocurrency is a system that meets six conditions:[37]

  1. The system does not require a central authority; its state is maintained through distributed consensus.
  2. The system keeps an overview of cryptocurrency units and their ownership.
  3. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how determines the ownership of these new units.
  4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
  5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
  6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

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