How do cryptocurrencies work?

2 May, 2019 | AtoZ Markets - Many have heard about the different cryptocurrencies, after the crypto craze in 2017 when Bitcoin rose to a value of 20,000USD. Yet, do crypto enthusiasts really understand how cryptocurrencies work? Back in 2017, we could see that lots of people just jumped on the hype and FOMO. Whilst most people don't even know how crypto works or its main algorithms. To help out these new crypto enthusiasts and investors, AtoZ Markets created this guide for you to understand more about cryptos. 

How do cryptocurrencies work? 

Cryptocurrencies work in a completely new monetary system that is not regulated by any centralized body or monitored by a formal institution.

The digital asset is supported by a decentralized peer-to-peer network called the blockchain, which tracks all cryptocurrencies, regardless of whether they are stored in a digital wallet or used in trading.

Each transaction is checked for accuracy, and the system is anonymous. A cryptocurrency has a ledger, which forces everyone to "play fair" as all transactions are public so that totally transparent. The ledger is a list of entries in a database that nobody can change without fulfilling specific conditions. Nobody owns the ledger or the cryptocurrency blockchain; instead, it’s decentralized meaning self-run and self-governed without the interference of outside parties.

What are the main algorithms of cryptos?

There are two main algorithms related to cryptos: SHA256 and Scrypt. SHA256 is a Bitcoin and several of its clones algorithm. It used in bitcoin mining as the proof of work algorithm and in the creation of bitcoin addresses, but also it is used to improve security and privacy. SHA stands for “Secure Hash Algorithm” (SHA-256).SHA-256 algorithm mining can be performed on an ASIC hardware (application-specific integrated circuit) The SHA -256 cryptocurrency algorithm is used to mine:

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BitcoinCash (BCH)

Bitcoin (BTC)

21Coin (21)

Peercoin (PPC)

Namecoin (NMC)

Unobtanium (UNO)

Betacoin (BET)

Bytecoin (BTE)

Joulecoin (XJO)

Devcoin (DVC)

Ixcoin (IXC)

Terracoin (TRC)

Battlecoin (BCX)

Takeicoin (TAK)

PetroDollar (P$)

Benjamins (BEN)

Globe (GLB)

Unicoin (UNIC)

Snowcoin (SNC)

Zetacoin (ZET)

Due to its high cost, ASIC mining hardware could be used by only wealthy enthusiasts of bitcoin mining.

The main feature of the Scrypt algorithm is resistance to GPU and ASIC mining. Scrypt requires larger amounts of memory than SHA256. The first cryptocurrency based on the Scrypt algorithm was Litecoin, and since the source code of this currency was left open, after some time there was a real boom of altcoins (alternative coins - the common name for all cryptocurrencies that appeared after Bitcoin).

The Scrypt algorithm - What are Crypto Altcoins? 

At the moment there are several hundred altcoins. The Scrypt algorithm is more simple and quicker than the SHA-256 algorithm. Scrypt’s hash rate is measured by KH/s: kilohashes per second, or one thousand hash computations per second. Scrypt algorithm mining can be performed on a computer CPU, Graphics Processing Unit (GPU), there is some ASICs hardware that is available for Scrypt mining.

The Scrypt cryptocurrency algorithm is used to mine:

Litecoin (LTC)

Dogecoin (DOGE)

Novacoin (NVC)

WorldCoin (WDC)

Latium (LAT)

FeatherCoin (FRC)

Bitmark (BTM)

TagCoin (TAG)

Ekrona (KRN)

MidasCoin (MID)

DigitalCoin (DGC)

Elacoin (ELC)

Anoncoin (ANC)

PandaCoins (PND)

GoldCoin (GLD)

The SHA256 and Scrypt algorithms are most popular among cryptocurrencies, but there are others besides them. For example, there is an X11 Algorithm, used for Dash coin mining, Cryptonight- Monero mining, and Dagger Hashimoto, proposed especially for the mining algorithm for Ethereum.

How to invest in cryptocurrency?

To work with cryptocurrencies- you need special software - a wallet (or cryptocurrency exchange) to store your cryptocurrency. It could be a paper wallet, which is also called as cold storage, a digital wallet, and a hardware wallet. The crypto storage allows users to work with the blockchain and generate transactions or receive transfers to their digital or paper wallet address. Two keys are necessary for working with the crypto wallet:

  • a public key is an address where an owner can transfer funds;
  • a private key is a secret alphanumeric code, with which the user signs his translations.

Wallets use an encrypted electronic signature a piece of data that provides a mathematical proof that the transaction came from the owner of the wallet.

After the transaction gets submitted to a public ledger it awaits confirmation. The confirmation process takes a bit of time while “miners” mine. Mining confirms the transactions and adds them to the public ledger.

The signed transaction is transmitted to the network and, after several confirmations, the funds are credited to the specified address.

How to verify crypto transactions?

What do you need to do to start investing in cryptocurrency, through an exchange after crypto's purchase?

At first, the transaction cannot be confirmed as it is not official until it passes the verification process. After confirmation, the transaction becomes part of the record of recorded transactions placed on the blockchain. Crypto miners use powerful computers to solve complex math problems, which are the key to the verification process.

Cryptocurrency mining is open source, so anyone can confirm the transaction, and the first miner to solve the problem will be to add a block to the transaction log. This process is called the "proof of work system." After adding a block to the ledger, the miner receives a reward for his efforts, which depends on the cryptocurrency.

Do cryptos have a future?

Cryptocurrencies are very popular in the media. Because of all the drama around the cryptos, many filmmakers and documentalists have already taken the opportunity to talk about bitcoin through their work. Someone makes profits on the growth rate of digital assets, someone calls them the next "bubble." Politicians accuse owners of cryptocurrency in money laundering, and large stores are beginning to accept payment in cryptocurrency. It seems like, despite all controversy, the cryptos came here to stay.

Think we missed something? Let us know in the comment section below.




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