Cryptocurrencies: what they are and how they work [2020]

cryptocurrenciesCryptocurrencies: the cryptocurrency word is the Italianization of English cryptocurrency and refers to a digital representation of value based on cryptography. The etymology of the word derives from the fusion of "cryptography" and "currency": it is an equal and decentralized digital resource.

Let's get to the bottom of it

What are cryptocurrencies?

The internet world is a diverse and vast world, full of so many things that are not yet fully known to all people. The web is like an iceberg: the part that emerges from the water is the part of the internet completely visible, while the lower part (that is, the one in the water) is the part foreign to the whole world. That's the Deep Web. It also includes cryptocurrencies, which have become famous thanks to this hidden part of the internet.

What are cryptocurrencies? Something can already be seen from the name: cryptocurrencies are digital coins used to shop; they are also called crypto coins. These cryptocurrencies enjoy Blockchain technology that guarantees an unseatable protection system against these digital coins. In addition, payments made with cryptocurrencies are difficult to trace, guaranteeing anonymity even to malicious people.

What are the most famous cryptocurrencies?

cryptocurrenciesThe most famous cryptocurrency is Bitcoin but there are many others such as Ethereum. Behind these there are intense trading activities: because they work just like money, they have a particular value in the financial sector and also in the stock exchange where many people invest money and shares on them.Therefore there are great business possibilities and it is also likely that in the future these can become a valid alternative for online purchases.But until cryptocurrencies accept various regulations and abandon their decentralization (Bitcoin problem) in favor of a centralized system in which there is someone to control them, they cannot be considered a valid investment alternative in the European market.

Although cryptocurrencies are used to buy common goods, they are invested even for darker purposes. As mentioned above, purchases through cryptocurrencies are guaranteed by anonymity and therefore you cannot know the sender or recipient.

Precisely for this reason, many people, moved by bad intentions, use them on the Deep Web where there is a huge black and illegal market on which various dangerous commercial activities take place.
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Who created the cryptocurrencies?

Who's behind cryptocurrencies?In general, this virtual "money" is created and developed by engineers or computer scientists. Behind the creation of these currencies there are intense calculation and computer development operations, as well as tests to verify the solidity of their security.Since a Hacker attack would affect the growth of this digital money, it is important to build a durable security system that is not so easily circumvented.

The main features

Encryption

EncryptionCryptocurrencies use strong encryption in several ways. Encryption arose from the need to find secure communication methods during World War II, in order to convert easily readable information into encrypted codes. Since then, modern cryptography has evolved a lot, and in today's digital world it relies primarily on computer science and mathematical theory.It also draws on the science of communication, physics and electrical engineering.There are two main elements of encryption that apply to cryptocurrencies: hashing and digital signatures.

  • Hashing verifies data integrity, maintains blockchain structure, and encrypts people's account addresses and transactions. It also generates those cryptographic puzzles that make it possible to extract a block.
  • Digital signatures allow a person to prove possession of part of the encrypted information, without revealing such information. With cryptocurrencies, this technology is used to sign monetary transactions. This shows the network that the account holder has consented to the transaction.

Il Blockchain

A blockchain is the decentralized public register or cryptocurrency transaction list. Full blocks, which include the latest transactions, are recorded and added to the blockchain. They are kept in chronological order as open, permanent and verifiable documentation. A peer-to-peer network of market participants manages blockchains and follows a precise protocol to validate new blocks. Each "node" or computer connected to the network automatically downloads a copy of the blockchain. This allows everyone to track transactions without having to record data centrally.Blockchain technology creates a registration that cannot be modified without the consent of the rest of the network participants. The concept of blockchain is attributed to the founder of bitcoin, Satoshi Nakamoto. This concept has also inspired other applications that go beyond money and digital currencies.   

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Block mining

Block mining is the process of merging new transactions into a blockchain in the form of blocks. In this process – if we talk about bitcoin, for example – new bitcoins are produced, adding to the total number of coins in circulation. Mining requires special software that is used to solve mathematical puzzles, and this validates the legitimate transactions that make up the blocks. Such blocks are added to the public register (blockchain) approximately every 10 minutes. When the software resolves transactions, the "miner" is rewarded with a precise number of bitcoins. The faster the miner's hardware in processing the mathematical problem, the more likely it is to validate the transaction and reward in bitcoin. 

block mining

What will be the future of cryptocurrencies?

If cryptocurrencies are to be recognized as an alternative currency in the future, they must go through a very profound optimization process, also trying to limit or reduce certain functions (such as anonymity) that cover illegal activities.

It is also likely that these cryptocurrencies will disappear and be forgotten, but it is not possible to say exactly what the future holds in store for this. However, we need to think about the present and it can be said with certainty that these are gradually becoming very popular.

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Online trading platform

Coinbase is a digital currency exchange platform based in San Francisco, California. It was founded in July 2011 by Brian Armstrong and Fred Ehrsam and in October 2012 launched its online services to buy and sell Bitcoin.

About Coinbase I have created a complete guide on how it works and how to use it that you can find here: Coinbase: definitive guide to use.

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