How cryptocurrencies work in simple terms

  • 12.5.2022
  • Written by Vladyslava Rykova
  • Category: News

As you know, cryptocurrency has been legalized in Ukraine. Zelensky signed the law “On virtual assets”, adopted by the Verkhovna Rada of Ukraine on February 17, 2022.

This technology has rapidly entered modern life, the term “cryptocurrency” can be heard at every turn. Someone praises her, and someone openly criticizes. However, most people still do not understand how it works.

как работают криптовалюты

About the work of cryptocurrencies

Cryptocurrencies are alternative currencies. One of their main differences is that they are decentralized. Simply put, they are not run by a government or an organization. Cryptocurrencies also refer to P2P currencies, or peer-to-peer currencies. This allows individual users to purchase and sell goods or services directly, transactions do not require intermediaries and third-party organizations such as banks.

Looking at cryptocurrencies in general, they all have the same underlying technologies and concepts.

About blockchain

When making a transfer at a bank, or any other transaction, the bank does not immediately withdraw money from the account from which the transfer was made, and the recipient does not immediately receive the amount of the transaction. The bank only for its own convenience stores information about the transfer as long as it needs. Immediately after the operation, only the balance of the sender, sometimes the recipient, changes. With such a system, monetary transactions occur by the principle of records in databases. There is no need to physically intervene.

For the independent functioning of a cryptocurrency without a specific intermediary, each participant in any transaction must have a way to store transfer data. At the same time, you can buy the cryptocurrency itself for fiat (for example, UAH) in such exchangers as ChangeIt. The problem in this case can be solved without a base or central servers.

Blockchain is an open list of transactions that is cryptographically protected. With the help of cryptography, a chain is created, consisting of blocks of records of various transfers and transactions linked to each other. Each block, on the other hand, has a unique identifier that links it to the previous block.

Once the blocks enter the blockchain, they cannot be changed, unless you lose data on the entire chain, after the changed block. When data is lost, users are notified of the chain change, which means that the new data chain cannot be used. It is important to mention that modified chains only make sense when they have been accepted by the majority of participants in transactions.

Electronic wallets with cryptocurrencies are linked to the blockchain, which guarantees that user balances correspond to real balances. New payments are always checked and compared with data from the blockchain. This ensures that the transaction is real and was actually made.

Cryptocurrency mining

In order to determine which blocks of translations should be added to the blockchain, and also to make these blocks simply possible to create, some users are engaged in mining.

Those engaged in mining, or in a simple way – miners, use the power of computers or special mining farms. With their help, performing complex algebraic calculations, they literally prove that the transaction was actually committed. Due to the existence of mining, spam, fake transaction records and their cancellation can be recognized. Efficient mining is extremely expensive.

Cryptocurrency wallets

Cryptocurrencies cannot be stored on ordinary electronic wallets or plastic cards. To store cryptocurrencies, special wallets are used. The cryptographic key, which all such wallets possess, allows the user to access his balance.

Use of cryptocurrencies

Bitcoin was the first cryptocurrency to be decentralized. Now it is the largest and most famous cryptocurrency in the world. In 2008, it was created by an unknown person using the pseudonym Satoshi Nakamoto, and in 2009 he also created the first bitcoin wallets.

The popularity of bitcoin is growing day by day. Now hundreds of large companies like Microsoft, Reddit, Subway and many others use cryptocurrencies to pay for their services.

You can buy other cryptocurrencies with bitcoin. They are traded on special crypto-exchanges and transactions are carried out with the help of bitcoin. The entire cryptocurrency market is estimated at hundreds of billions of dollars, the leading part of which is occupied by bitcoin.

Why use cryptocurrencies

The circle of use of cryptocurrencies is constantly growing, new ways of using them are emerging. This is due to the speed of transactions, low commissions and availability. It is possible that in the future cryptocurrencies will become the standard of monetary transactions.

Cryptocurrencies obviously have many advantages, but there are some problems that make their mass adoption difficult. For the most part, this is due to the low awareness of most people. It is difficult for beginners to understand the topic, many do not trust technology.

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Vladyslava Rykova

Expert in legal marketing. Head of marketing agency MAVR.

Business degree “Master of Business Administration” (MBA).

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