It’s often called “digital gold,” as some of the characteristics of bitcoin and other cryptocurrencies are similar to the precious metal often used as a store of value. But that comparison doesn’t do it justice.
Cryptocurrency is an electronic cash system that doesn’t rely on central banks or trusted third parties to verify transactions and create new units. Instead, it uses cryptography to confirm transactions on a publicly distributed ledger called the blockchain, enabling direct peer-to-peer payments.
That definition might seem downright cryptographic right now, but by the end of this overview, you won’t need a decryption key to understand crypto, you will want to find any asset bank right away.
Today we’ll cover:
The creation of bitcoin and the blockchain, the underlying technology of all decentralized cryptocurrency.
How the blockchain solves the problems associated with prior virtual currencies.
The function of cryptocurrency “miners.”
How to buy cryptocurrency.
In 2009, a programmer using the pseudonym Satoshi Nakamoto created bitcoin, the first ever cryptocurrency. Satoshi also created the blockchain technology, which makes all decentralized cryptocurrencies possible.
The blockchain was created as a solution to the “double-spending problem,” which arises in virtual currencies because it’s easy to duplicate digital information. A person could make a copy of his or her digital currency information and send both the original and the copy to separate parties.
Before bitcoin and blockchain, virtual currency relied on trusted third parties to prevent double spending. But Satoshi wanted to develop a decentralized currency, which meant finding a way for the network of bitcoin users to verify transactions.
“The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work,” Satoshi wrote in the abstract of the white paper announcing bitcoin. This was the earliest description of the blockchain.
Why is it called a blockchain?
A block is a collection of transaction data on the cryptocurrency network. It basically says Person A sent this much to Person B, and Person X sent this much to Person Y.
It also includes important information that allows the rest of the network to verify the validity of the block — such as the solution to a complex math problem — called a proof-of-work. While the math problem is hard to solve, it’s very easy for others to verify a valid solution. New blocks cannot be amended to the blockchain without a valid solution.
A block also includes a reference to the block that immediately precedes it. Thus, the blocks create a chain linking one to another through those references.
The reference to the preceding block is accomplished through something called a cryptographic hash function. A hash function takes a set of data and maps it to a string of letters and numbers called a digest. If anything in the data changes, the resulting hash digest will change as well.
Chaining blocks together by using a hash function to reference the preceding block adds a great level of security to the system. To change a block in the ledger, a hacker would have to reproduce the entire chain of blocks following it, since it would create a chain of invalid hash values referencing the previous block.
As more computing power joins the network, the blockchain grows longer, and as the amount of calculation required to solve the math problem and add a block increases, it becomes increasingly difficult to change data in the blockchain. A hacker would require a majority of computing power on the network to effectively alter transactions