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Cryptocurrency for Dummies! – Part 2 - How Cryptocurrency works?

Author : TechDogs Writer - #TD61219
Cryptocurrency for Dummies! – Part 2 - How Cryptocurrency works?
If you’ve done reading Cryptocurrency for Dummies! – Part 1, then Part 2 is where I’m going to take you through the inner workings of Cryptocurrency and tell you how the magic happens. Don’t worry it’s not going to have your eyes glazing over at the sight of over-the-top complex tech jargon!
Also if you haven’t read Part 1, then you really need to! Especially if you’re uninitiated in the Cryptocurrency world! 

First I need to set the stage. Imagine, if you will, that you are in the beautiful city of Giza, sitting on the banks of the Nile and you look up and behold the Pyramid of Khufu and in all of your amazed wonder at beholding this beautiful, complex, yet simple structure you’re probably wondering why your author has taken you there and what being there has to do with Cryptocurrency.

Well nothing really. It’s just more graphically easier to imagine than the image of a program running itself and creating a chain of virtual events and recordings which Cryptocurrency does.

Cryptocurrency’s wheels run on what’s known as the BLOCKCHAIN. Like the beautiful pyramids, blockchain technology, is a set of blocks which contain secured transactions of the Cryptocurrency world, wherein each block, when added to the chain becomes permanent and cannot be undone.

It isn’t possible today to go through a news site or visit any of the Tech biggies without missing the world’s movement in Blockchain Technology. It’s all the rage!

So here’s what you need to know about this technology. The blockchain is a publicly available record or ledger of every single account, transaction and related data that goes through a particular network. A record which cannot be changed and once created is a permanent fixture.     
           
The blockchain works on a peer to peer network basis. Since there isn’t a bank – once a transaction takes place, that transaction is sent to the entire network. The transaction is then verified by the peer network but it is only confirmed and recorded after a period of time.

(Peer to Peer Network is basically a group of people connected to each other via technology wherein you can share digital stuff – graphically it would look like a group of computers worldwide connected together sharing digital information example movies, songs, data) 

An obvious question that would pop into your mind just about now, would be, how does the network prevent a person from transacting twice if there is a time-lag between the processing of the transaction and it being verified and recorded in the blockchain, considering that there is no centralized system which tracks and avoids a double spend. (If the question didn’t pop into your mind, just pretend that it did and nod along with me and say “but of course I did”)     

Since there isn’t a server that records the transactions, you basically need every peer on the network to have a list of all the transactions, know the balance in every account and then use that to cross-check and validate newer transactions. For this to work there needs to be a unanimous consensus or agreement from the entire network.

To break it down for you:
  1. Bob processes a transaction using an account aka wallet
  2. This transaction is broadcasted to the entire peer to peer network (P2P network) consisting of computers aka nodes
  3. The network of nodes confirms that Bob has all the required necessities to complete the transaction and validates the transaction using an algorithm
  4. Once verified Bob’s transaction is combined with other transactions to create a new block of data for the ledger
  5. The algorithm is cryptographic proof that a block is valid and the transactions in it are not fraudulent
  6. The creation of a block is called mining or forging or minting
  7. This new block is fitted into the existing blockchain. Once added it becomes unalterable and is permanent
  8. Bob’s transaction is confirmed and is now complete
Until a transaction is confirmed it remains as pending.

(Mining is the term used for Blockchains running on “Proof-of-Work” –PoW systems such as Bitcoin. Forging or minting are terms used by those running on “Proof-of-Stake” – PoS systems such as Ethereum)

So thus far you know that;
  • Cryptocurrency as a medium of exchange runs on Blockchain Technology
  • It’s validated using a peer to peer network
  • The Blockchain records every transaction that ever takes place and consists of blocks which is nothing more than a set of transactions
  • Once a block is added to the blockchain it is permanent and unalterable
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