Cryptocurrencies and How they Work

Cryptocurrencies and How they Work

Every year, technology enthusiasts make their bets and predictions on the newest innovation that might be call at the approaching weeks and months. But it’s been a minimum of a few of decades since something radical surfaced, which shook the whole industry up. The last time this happened was when the web started becoming mainstream and other people who denied it’s adoption and viability stood corrected.

This time around an identical trend is being observed with Blockchain and Cryptocurrencies. The latter half the year 2017 was dominated by news about Bitcoin reaching all-time highs and exceeding every possible expectation and other people on the Wall Street and other major finance moguls trying to outright deny it’s validity within the end of the day .

Like it or not this technology is here to remain and since it’s all the excitement immediately , it only made sense that we educate a wider audience on what this stuff are and the way they impact our lives. You see getting involved a technology deeply is usually one’s own choice, but it’s just one occasion during a few decades that a paradigm shift just like the internet or blockchain happens. And love it or hate it, you'll need to get yourself conversant in the technology. Unless you would like to measure sort of a dinosaur within the modern age.

With Cryptocurrencies and Blockchain, it’s extremely important that we take the right approach to explaining them in order that it doesn’t become too daunting for the typical person. this is often why we’re taking a bottom-up approach to those series. We first focused on getting the basics clear with the Grokking Blockchain article which I highly recommend you read before proceeding with this post. And during this post, we’ll repose on top of that post to elucidate how Cryptocurrencies work.

It’s still important to offer a quick refresher to those that have read the Grokking Blockchain post are a minimum of conversant in the working of the blockchain.

The blockchain is essentially a public, append-only, distributed ledger where transactions are added to the network and are validated by all parties present on the network.

This is most minimal definition there's to what blockchain is. If you would like to actually get into the nitty-gritty details of the underlying tech and the way it operates, ask the previous post during this series.

Let me make a robust disclaimer before proceeding though, without having read the previous post or without having the understanding of the working of a blockchain, this post isn't getting to be helpful to you. It’s probably just gonna confuse you more. So moving on I’m assuming that you simply have researched about the blockchain and have a working understanding of an equivalent .

Alright, let’s move along!

We took an illustrative approach to explaining things within the previous post and we’re gonna do an equivalent here supported the initial feedback received.

To understand the advantages of using Cryptocurrencies we’ll undergo an example of a typical payment/transaction flow.

Let’s say you Steve attend Starbucks to urge yourself a hot cup of Coffee (Pumpkin Spiced Latte!). You place the order and you select to form the payment via your card, you swipe your card, enter the PIN then take the receipt then you sit patiently and await your order.

This is the flow most folks are conversant in and most folks use. What’s worth noticing here is that the incontrovertible fact that what people assume with reference to the transaction. As soon because the receipt is out of the POS/Card machine, 90% folks think that the quantity has been deducted from our checking account and transferred across the network and is instantly reflected into Starbucks’ checking account .

This is not true actually. In real world , for the quantity to finally reflect into the recipient’s checking account , it takes roughly 3 to five business days (This is additionally the case when an e-commerce issues a refund but it gets to your account after a few of days).

There are formal procedures in situ which attribute to the long delay. once you swipe your card and enter your PIN you notify your bank that you simply want to transfer a particular amount to the recipient, which is then transferred as an instrument to a clearinghouse, the clearinghouse then approves the transaction after certain checks and eventually , the quantity is reflected within the recipient’s account. Since most of this process is manual and verified by actual employees sitting on desks, there’s tons of latency involved within the process.

Latency in processing is certainly not the sole thing that companies and consumers got to worry about. There’s significant transaction fee levied at each stage of this process, making the particular amount received by the recipient be a minimum of a few of twenty-two lesser than the quantity paid by you.

This is the rationale why smaller businesses refrain from employing a card for accepting payments for a small-value transaction.

This is what Bitcoin and other cryptocurrencies try to vary .

Let’s consider an equivalent example again but rather than employing a card for payment, let’s use a Cryptocurrency. For sake of simplicity, we’ll assume that you simply Steve are using Bitcoin to pay the barista at Starbucks. You place the order, the order is billed and a QR code is displayed on the POS which is that the wallet address of the shop .

You open your wallet and initiate a payment by scanning the QR code. Once you’ve successfully entered the PIN, that transaction is appended to the blockchain. The network which maintains and keeps the ledger in sync verifies the transaction and this usually takes roughly 10 minutes. Once this is often done the quantity (in bitcoins) is reflected within the recipients’ wallet.

There are a few of subtle things to notice here. First would be the speed of transaction. Since there’s no manual intervention required within the process, it's exponentially faster than a typical bank transfer. Second, there’s no transaction fee or a really minute transaction fee that's levied per transaction. Third, since the transaction is verified by the whole network, it eliminates the matter of double spending or fraudulent transactions.

This is how game-changing Cryptocurrencies are. Just imagine how easy it might be for you transfer money from anywhere within the world regardless of the currency and amount during a matter of minutes.

Now I agree that folks who are even a good bit conscious of how Cryptocurrencies work have some pretty legitimate questions regarding my explanation. Don’t worry I even have accumulated an inventory of the foremost common ones and that i hope they cover most of your concerns if there’s anything more that you’re not clear about, write it to us within the comments section or tweet it bent us and we’ll respond.

Here’s an inventory of commonly asked Questions

1. You say transacting with Cryptocurrencies wouldn't incur any significant fees but I see people paying exorbitant fees for transfers, what’s up with that?

Ok, so let’s get a really basic premise clear. Currently there quite 1300 Cryptocurrencies out there. It’s safe to mention that 1295 or more of them will never amount to anything within the end of the day , in order that limits our target set to about let’s say 5 or at the best 10 Cryptocurrencies. during this set of 10 coins we've the more popular coins like Bitcoin and Ether then some less known but rising coins like Ripple, IOTA and therefore the likes. What you would like to know very clearly is that each coin works on a totally different principle. Essentially every coin that's launched tries to unravel a drag with existing coins. The question that you simply just had are often isolated to Bitcoin.

Let me explain, yes there’s an enormous transaction fee related to transferring Bitcoins from one address to a different . the rationale behind that's the very fact that Bitcoin is that the hottest Cryptocurrency out there and love it or hate it, despite the very fact that folks might not know anything about Cryptocurrencies or Blockchain, they still want to urge involved Bitcoin. It’s pure craze.

Bitcoin works on a supply to demand ratio principle (almost like gold) which decides the worth of a coin. Meaning if the demand for Bitcoin increases, the worth also will increase because the supply is usually limited.


In this article, we presented an isolated view of what a cryptocurrency is and the way it works. Agreed Bitcoin is currently the most important and therefore the hottest coin out there. But which will not be the case forever. It’s crucial to know the underlying principle that each one coins are supported , once you're clear that , every coin announced or to be announced within the future would be a layer on top of that base. within the upcoming posts, i will be able to cover a number of the favored and promising Cryptocurrencies  the way they pile up against one another . Until then, confirm you read up the maximum amount as you'll before investing.

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