Cryptocurrency is a digital or virtual currency designed to function as a medium of exchange. It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are limited database entries that no one can change unless certain conditions are met.
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History
There have been many attempts to create digital currency during the tech boom of the 90s, with systems such as Flooz, Beenz and DigiCash emerging, but inevitably failing. There were many different reasons for their failures, such as fraud, financial problems and even clashes between company employees and their bosses.
Significantly, all of these systems used the Trusted Third Party approach, meaning that the companies behind them verified and enabled transactions. Due to the failure of these companies, the creation of a digital cash system has long been considered a lost case.
Then, in early 2009, an anonymous developer or a group of developers under the pseudonym Satoshi Nakamoto introduced bitcoin. Satoshi described it as a "peer-to-peer electronic cache system". It is fully decentralized, meaning there are no servers involved and no central control authority. The concept closely resembles a peer-to-peer file sharing network.
One of the most important issues that the payment network has to address is double spending. It is a manipulative technique of double consumption of the same amount. The traditional solution was a trusted third party - a central server - that kept records of balances and transactions. However, this method assumes jurisdiction over your assets and all your personal information.
In a decentralized network like bitcoin, every participant has to do this job. This is done through a blockchain-public registry of every transaction that has ever occurred within the network, accessible to all. Therefore, everyone in the network can see the balance of each account.
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Each transaction is a file consisting of the sender and receiver's public keys (wallet address) and the amount of coins transferred. The transaction must also be signed by the sender with his private key. All this is just basic cryptography. Eventually, the transaction is broadcast online but needs to be confirmed first.
Within the cryptocurrency network, only miners can confirm transactions by solving a cryptographic puzzle. They take the transactions, mark them legitimate and spread them online. After that, each nodih adds to its database. When a transaction is verified it becomes irreversible and non-refundable and the miner receives a reward, plus transaction fees.
Basically, any cryptocurrency network is based on the absolute consensus of all participants regarding the legitimacy of balance sheets and transactions. If the nodes did not agree on one balance, the system would basically fall apart. However, there are a lot of rules pre-built and programmed into the network that prevent this from happening.
Cryptocurrencies are so named because the consensus mechanism is secured by powerful cryptography. This, together with the above factors, makes third parties and “blank trust” as a concept completely incoherent.
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Posted via Steemleo