Nowadays cryptocurrencies have become a global phenomenon and are known by almost everyone, but do you really know what cryptocurrencies are and how they work?
Already in 2018 a large part of banks, accounting firms, computer companies and even governments have been related to cryptocurrencies, or have investigated cryptocurrencies or even started a blockchain project. Although they have become enormously popular in recent years, the basic concepts of cryptocurrencies are understood by relatively few people.
What then are cryptocurrencies?
To understand this, we must go back to the beginning of crypto, this was in 2008, Satoshi Sakamoto invented Bitcoin in this year, as a “peer-to-peer” or “P2P” electronic payment system (which is literally a peer network: a computer network in which all or some aspects work without clients or fixed servers, but a series of nodes that behave as equals, with each other). To create digital money, you need a payment network with balances, accounts and transactions. This is quite easy to understand.
A big problem that most payment networks, without central servers, have is avoiding the so-called “double spending”, in which a currency, digital in this case, can be spent twice or counterfeited. Basically one of the big problems to solve was preventing an entity from spending an amount of money twice. Usually the prevention of this is done by a central server that keeps track of all balances, although in this case one of the characteristics of the cryptocurrencies is that there are no central servers (remember that we are talking about the “peer-to-peer” or “P2P”), this is why cryptocurrencies are said to be decentralized, because they work with a decentralized network. So you need each entity / node in the network to do this job. Each node in the network needs to have a complete list with all the transactions to verify that the future transactions are valid, and not an attempt of the so called “double expense” that we mentioned previously.
How can nodes handle this important and difficult task? If the nodes in the network do not agree on a balance, everything is interrupted. They all have to be on the same page, and agree with the balance, down to the last detail. No one knew how to accomplish this until mr. Satoshi Nakamoto proved that this is possible.
Cryptocurrencies are a fundamental part of this solution: to illustrate this we will give you a simple example of transactions on the network, that is, of the operation of a decentralized network:
> There is a transaction, this transaction is a file that says Bob gives Alice 3 Bitcoins, digitally, since we are talking about cryptocurrencies, which are essentially digital currencies.
Once this transaction is done, this transaction is transmitted to the “P2P” network, sent from a node to each of the nodes that make up the network, this is how P2P technology works regularly, there is nothing special about this that we have just to mention.
After a certain time, the transaction is confirmed, only (cryptocurrency) miners can confirm transactions, this is what they do in the cryptocurrency network. Cryptocurrency miners take a transaction, verify that it is legitimate, and broadcast it on the network. After a transaction is verified by a miner, each node that is part of the network adheres this transaction to its database. So then it becomes part of the Blockchain. For this work, cryptocurrency miners are rewarded with cryptocurrency, for example, with Bitcoin.
Anyone can be a miner, they simply use very powerful computers for the task they perform. Each miner competes to solve a mathematical problem, after finding a solution, a miner can confirm the transaction and add it to the Blockchain, as an incentive to do this, the miners receive a payment from the network, in the form of cryptocurrency. In this way, the network of independent participants who are financially incentivized can maintain the legitimacy of each transaction and function. This is basically how cryptocurrencies and cryptocurrency transactions work.
Cryptocurrencies are the key to a very complex digital money problem, which mr. Satoshi solved very intelligently, and thus maintained consensus and integrity between independent participants and participants who potentially have bad intentions. Cryptocurrencies are essentially the economic incentive offered to anyone who wants to keep the network safe and working properly.