Nakamoto did not intend to create a virtual currency, but simply an electronic money transfer system from one point to another, or from one person to another, without the need for banks or other money transmission systems. However, he managed to achieve what many failed, a cryptocurrency!
1. What are cryptocurrencies?
Cryptocurrencies are actually virtual money. They can be kept in virtual wallets and can be used for transactions, but can also be exchanged for other cryptocurrencies or even classic money. Nowadays, there are a lot of cryptocurrencies, from the most well-known ones, such as Bitcoin, Ethereum or Ripple, to the least known ones.
But this has not always been the case. The first cryptocurrency was Bitcoin and was intended to serve as a virtual currency for goods or services. The first cryptocurrency transaction, more precisely with Bitcoin, was made in 2010. Then 10,000 Bitcoins were used for 2 pizzas. The funny thing is that nowadays, 1 Bitcoin is worth about $ 6,000! And at its peak, Bitcoin reached a value of about $ 20,000 in December 2017.
From the first transaction until today, the value of the Bitcoin cryptocurrency has increased hundreds of thousands of times, and now not only has it been joined by a lot of other cryptocurrencies, but the virtual market has grown so much that companies and even governments have effective in them.
For classic money, the tax authorities of each state, but also the international ones, ensure the number of pieces (banknotes, coins) circulating on the market, but also their safety, fighting against counterfeiting money.
Cryptocurrencies are traded through a virtual point-to-point system, without going through a tax authority of any kind. Thus, they circulate in a decentralized system. The number of cryptocurrencies in the market is not controlled at one point, but at all points in the system at the same time. Just as the central bank of the state controls the amount of money, the units of a cryptocurrency are controlled by every miner who produces that currency.
Each Miner that produces a type of cryptocurrency has a list of all transactions made with that currency, thus validating them. The creation of “counterfeit” virtual currencies is extremely unlikely because it would require considerable computing power, at least 50% higher than that of the entire network, to be concentrated in a single point.
2. What is a Miner?
A Miner is a computer (or computing unit) that calculates and validates the algorithm that underlies a cryptocurrency, keeps track of all transactions, and is rewarded for doing so with an amount of that cryptocurrency.
For example, let’s say Ion sends an X Bitcoin number to Maria. This transaction bears Ion’s unique cryptographic signature and is public to all Miners in the network. This transaction is then automatically transmitted to each Miner in the network, almost instantly. Once the transaction is confirmed, it becomes irreversible and entered into the transaction histories, called blockchain. Only Network Miners can confirm a transaction.
Cryptocurrencies are restricted entries in a database that cannot be altered except under very specific conditions. We must also mention that there is a limited number of each cryptocurrency, this being decided by the software developer who created it.
Compared to classic money, cryptocurrencies are divided to the eighth decimal place, which means that you can own fractions of a cryptocurrency, with which you can also make transactions.
3. How do you get cryptocurrencies?
Anyone can be a miner. As it is a decentralized network, there is no authority to decide this, and cryptocurrencies need a system to prevent the emergence of a single entity that controls the network. Thus, Nakamoto imposed the rule that Miners must invest the work of their computers to qualify for this task. In fact, they need to find a hash – a product of a cryptographic function.
A cryptocurrency can only be created if the Miners solve a cryptographic puzzle. Since the difficulty of this puzzle increases the amount of computer energy that the Miner invests, there is only a certain amount of cryptocurrency that can be created in a certain period of time. This is part of the consensus that no Miner can break.
On the other hand, you can buy cryptocurrencies with classic money, if you don’t want to mine!
4. The benefits of cryptocurrencies
Global speed: transactions are propagated almost instantly on the network and are confirmed in a few minutes. Because it happens in a global network of computers, they are completely indifferent to your physical location, it doesn’t matter if you send Bitcoin to your neighbor or to someone from the other side of the world.
Security: cryptocurrency funds are locked in a public key cryptography system. Only the private key owner can send cryptocurrencies. Strong cryptography and the large number of Miners who have to validate make it impossible to break this scheme.
Freedom: You must not ask anyone for permission to use cryptocurrencies. It’s just software that everyone can download for free. Once you have installed it, you can receive and send cryptocurrencies.