The Key Points You Should Know About Cryptocurrency

By Malinda Wimalasena

The Key Points You Should Know About Cryptocurrency

What is Cryptocurrency?

With the advancement of human needs, they had to find a medium of exchange for goods and services. In the early stage, they used the barter system. But with the growth of human needs and the population, this system got changed and now it is in the modern currency stage. Modern currency includes paper currency, coins, credit/ debit cards, digital wallets, etc. All these modern currencies are controlled by banks and governments.

All the transactions that we are doing today are managed by a legal body in a particular country. But there are some issues in this traditional system such as,

  • The central point of failure in banks.
  • Transfer limit is getting exceeded.
  • User accounts are getting hacked.

Is there any method to solve these issues? Yes, it is the place where Cryptocurrency comes into the picture.

Cryptocurrency is a digital or virtual currency that can be used for online transactions. It enables peer-to-peer transactions by which we can make payments and trades just as sending a message from one person to another person. The world came to know about the concept of cryptocurrency with the invention of Bitcoin. In 2009, Bitcoin was invented by Satoshi Nakamoto. A physical person with this name has never been found. So, we can consider it as a pseudonym to identify the inventor of Bitcoin.

Core Features

  • There is a limit to the number of units that can exist. E.g.: For Bitcoins, it is 21 million.
  • Functionality is fully independent of a central authority.
  • Mainly based on decentralized computer networks.
  • Easy to verify the transactions.
  • Several conditions should be satisfied before adding new units to the system. E.g.: For Bitcoin, miners will be rewarded with Bitcoins only when a block is successfully added to the blockchain.
  • 24/7 access to money.
  • No limits of purchases and withdrawals.
  • International transactions are faster.

Technology behind Cryptocurrency

“Crypto” means the various kinds of cryptographic techniques used to secure a particular entity. So, when it is combined with “Currency” it creates an idea of a payment or a trading medium that is secured under different cryptographic techniques such as hashing, public-private key pairs, and the other various kinds of available encryption methods.

The main technology behind cryptocurrency is Blockchain. It manages all the transactions using a decentralized computer network. It is a network of computers in which all resources are distributed in all the nodes. A ledger is used to store the transaction data which is shared or copied by each node in the network. As a main feature of blockchain, every new block should be verified by every node of the blockchain before adding it to the blockchain. So, it ensures the integrity of the transactions happens via cryptocurrencies.

How it works

We can divide the process behind Cryptocurrency into four major steps. They are,

  • Transaction Details First, we need the basic data such as sender info, receiver info, amount, date, etc. to perform the transaction.

  • Hashing Algorithm Then it is passed through a Hashing algorithm. A Hashing algorithm is a cryptographic Hash function that is used to map data of arbitrary size to predefined fixed-size values. Eg - The SHA256 algorithm is used in Bitcoin transactions.

  • Signature Algorithm Next, the output is passed through a Digital Signature Algorithm (DSA) with the user’s private key. This digital signature is a cryptographic value that is generated from the data and a secret key known only by the sender. Then this digitally signed output is distributed across the network with the sender’s public key. So, anybody can verify whether the message belongs to the sender with this public key.

According to CoinMarketCap.com, these are the top ten cryptocurrencies by the total market value of the circulating supply on the 26th of February 2021.

Cryptocurrency Market Capitalization
Bitcoin $862.95 billion
Ethereum $168.75 billion
Binance Coin $34.82 billion
Tether $34.99 billion
Cardano $34.31 billion
Polkadot $27.70 billion
XRP $19.56 billion
Litecoin $11.39 billion
Chainlink $10.23 billion
Bitcoin Cash $8.96 billion

Advantages

  • Easy and fast to perform transactions.
  • No need for the involvement of the third-party authorized legal bodies such as central banks.
  • Secure than traditional payment systems.
  • Avoid the central point of failure.
  • No transfer limits.
  • Minimal processing fee.
  • No value reduction via inflation.

Disadvantages

  • Some cryptocurrencies can be easily used for illegal activities such as money laundering and tax evasion. But some cryptocurrencies such as Bitcoin use inbuilt algorithms to track and collect data on criminal activities and illegal businesses.
  • Frequent fluctuations in token values. Eg - The token value of a Bitcoin was $18,984.77 on the 19th of December 2017. But just after about one and a half months, on the 7th of February 2018, it appeared as $7,270.51. (This data was taken from coindesk.com)
  • Although cryptocurrency blockchains are highly secured, the echo system including digital wallets and exchanges are not that secure.
  • To get profit someone should pay more than you expended.
  • Less viable as a currency.

Conclusion

Cryptocurrency is just a virtual currency type that is based on decentralized computer networks. As the main feature of Cryptocurrency, it can exist outside the control of authorized third-party bodies because of this decentralized nature. The value of cryptocurrencies is not stable according to the analytic data of the past 11 years.

So, still we have to think twice before investing in cryptocurrencies. Cryptocurrencies could not have created a cash flow like the modern currency system. Therefore, it cannot be convinced whether we can completely move into cryptocurrencies in the future. So, most probably people would continue the current hybrid system that uses both modern currencies and cryptocurrencies for their financial needs.