Unless you’ve spent the last decade under a rock, you will at least be aware of Bitcoin. Over the last decade, Bitcoin has taken its proponents on a roller coaster ride. They’ve witnessed dramatic fluctuations in price, the emergence of billionaires, tales of USB sticks containing millions of dollars of Bitcoin being lost forever; it’s safe to say that the ride has been wild.
But the underlying technology remains a mystery. If the technology behind crypto is a mystery to you, don’t worry, you are by no means alone. While the nitty-gritty technical details of cryptocurrencies are difficult to get your head around – unless you love math and cryptography – the broad strokes can be understood much more easily than you might think. With Samsung planning to release their own cryptocurrency wallet for their Galaxy range of smartphones, cryptocurrency is closer than ever to going mainstream.
Here are some of the key technologies that lie behind cryptocurrency’s phenomenal market growth.
If cryptocurrencies are e-mail, blockchain is the internet. The b
A blockchain is a decentralized distributed ledger, which sounds more complicated than it is.
A ledger, in this case, is similar to a real-world ledger, which businesses use to record transactions. In this case, the ledger contains a record of every single transaction ever made on the network. The ledger is cryptographically secure and immutable, meaning that it cannot be altered after the fact.
When new transactions are broadcast on the network, they need to be verified to ensure they are genuine. Users of a cryptocurrency network can contribute computing power towards this verification process in a process called ‘mining’.
There are relatively few cryptocurrencies that are designed to act as currencies. Most are designed first and foremost to be generated by computers to reward people for doing something useful. The market growth is built heavily on trust in blockchain.
In order for the network to work, it needs to be trusted. In the regular financial system, we trust our banks (at least to the extent that we trust our banks to manage our individual accounts), but we trust a cryptocurrency network because it is cryptographically secure. It’s relatively simple for anyone to broadcast a fake transaction on the network giving themselves millions of dollars, but the rest of the network would recognize and vote down the fake transaction.
Networks reward miners who contribute power to maintaining the network by giving them free network tokens when they mine a new block. Depending on the power of your setup and the cost of electricity, it can be possible to set up a mining farm that turns a profit. Note that this is a long way from being free money. However, more activity generally means more growth for a coin’s market value.
Cryptocurrency exchanges are where the action is. You can see cryptocurrency prices live at coins.live, but you might wonder where these prices come from. Exchanges allow users to swap cryptocurrencies with one another in the same way that the Forex market allows the sale of foreign currency between individuals. Exchanges monitor the trades that users make, watching for how much of one coin traders are willing to trade for another coin.
To the user of the exchange, it is just like buying and selling anything else inasmuch as there is a clear buy or sell price displayed. More advanced users can exert more control over their trades; many traders set up to automatically execute trades when certain market conditions are met. Exchanges are the foundation of the entire market and are essential to its growth.
In summary, the growth of cryptocurrencies is driven by a number of factors, including a growing awareness of and confidence in blockchain, the potential ROI on mining, and the emergence of exchanges that allow users to trade with a relatively low amount of investment capital.
Last Updated on February 3, 2021.