Basic Facts about Cryptocurrency

Why money was invented? Let’s look into the history

All human interactions involve exchange of goods or services in some way or another. In ancient times, commodities/ services were exchanged for commodities services and this system was termed as Barter System. But as the civilizations grew more complex, instead of exchanging domestic commodities themselves, man started using certain objects like figures of stone, wood or bones as means for exchange of goods or services. Afterwards, currency took shape of metal coins or rods or some other metallic objects. Later on, Chinese introduced paper currency and whole world has been following them since then even till today. Presently, almost every country in the world has its major part of currency in paper form or Banknotes.

Why digital currency is needed?

No doubt, paper currency or light metal coin currency is way superior and civilized method of transaction than the ancient Barter System or bone/ stone currency. But, it was materialized in 21st century that Paper currency was not a safe means of financial interaction as it, being a physically tangible entity, could be snatched, looted, stolen or physically embezzled. Hence, this predicament forced the economic man of 21st century to formulate some kind of non-tangible currency that could replace banknote or coin currency in all respects but could be way safer, secure and could ensure privacy too. Hence, was invented the concept of digital currency. Digital currency is a computer based medium of exchange and makes the user devoid of the paper/ coin currency. With the advent of newer and sophisticated technologies, Digital currency took many shapes. Cryptocurrency is one of them and in this article; we will discuss basics of cryptocurrencies.

What is cryptocurrency?

The word crypto means secret, covert or coded. In simplest terms, cryptocurrencies are lines of code having monetary value. Cryptocurrency is a modern concept in the history of money and it is the name given to a system that uses certain kind of electronic cash along with cryptography (the art of coding and decoding) to allow the secure transfer and exchange of digital tokens in a distributed and decentralized manner. These tokens can also be traded at market rates for fiat currencies.

Basic principle of cryptocurrency

The basic principle of cryptocurrency is as follows. First of all, it is a digital currency and paper notes are totally out of picture here. Secondly, it is not dependent upon a third party for clearing the transactions; which is the most striking feature of cryptocurrencies. Let me explain this in a little detail. For instance, in other digital currencies, when a person ‘A’ gives money to another person ‘B’ through his or her computer portal, a problem called Double Spending arises. What this means is that ‘A’ will be giving money to ‘B’ by sending some form of a computer file; as it is a digital currency. But, we all know that when we send a file through email, it remains in sent items and does not get deleted on its own. This brings the possibility of using the same file again and again and this phenomenon is called Double Spending. To solve this problem, all other digital currencies involve a centralized third party like a bank, PayPal etc, which ensures that the sent amount is deducted from the sender’s account. The biggest disadvantage to dependency upon an intermediary party is that these transactions can be reversed by intermediary party. However, cryptocurrencies have solved this problem and make transactions securely possible on decentralized peer to peer basis and the transactions are cleared and verified automatically without depending upon any sort of centralized clearinghouse. Hence, the control of whole network remains in the hands of the users themselves which creates an air of ‘Freedom’ and independency.

Some Technicalities of cryptocurrency

In fact, cryptocurrencies are predefined or pre calculated computer files which employ different sorts of key pairs which are formulated through a specific cryptographic algorithm. Any person carrying these key pairs is in possession of cryptocurrency. All the key pairs are archived in a file called ‘wallet.dat’ file. This file is housed in a hidden directory in the hard drive of the user. These are these encrypted key pairs which are sent between different users involved in a transaction. It is worth mentioning here that the loss of ‘wallet.dat’ file will result in the loss of cryptocurrency. Hence, it is the most important file item in the realm of cryptocurrencies.

Trends in cryptocurrencies

The first cryptocurrency was an open source project called Bitcoin, which began trading in January 2009 and it was the brainchild of a pseudonymous writer known as Satoshi Nakamoto. Since then, many other cryptocurrencies have been introduced following the lines of Bitcoin like Litecoine, Altcoine etc. ‘The First Time and the Final Transfer’ feature of cryptocurrencies has made them extremely popular in the market economy and many people are getting attracted towards them for continuing with their financial pursuits in the ever expanding digital age. But unfortunately, this innovative technology, being in its rudimentary form, has happened to fall into the hands of some people having malicious intentions in the recent past, who tried to hack into the cryptocurrency network protocols and were able to embezzled large amounts of money from accounts of users. But it is hoped that such problems will be resolved if the digital security paraphernalia is improved against hackers.

Future of cryptocurrencies

Cryptocurrency is an impressive technical achievement, but it remains a monetary experiment. It is suspected that even if cryptocurrencies survive, they may not fully replace fiat currencies but nothing can be said for sure in world economics. If people will show propensity towards adopting cryptocurrency, nothing will be able to stop it from achieving worldwide employment.