A cryptocurrency is a digital or virtual currency intended to act as a means of exchange. To encrypt and validate transactions, and to monitor the development of new cryptocurrency units, it uses cryptography. Cryptocurrencies are simply small entries in a database that nobody can alter unless certain criteria are met.
During the tech boom of 90s, there were many attempts to establish a digital currency, with systems such as Flooz, Beenz and DigiCash entering on the market but eventually failing. There have been several common explanations for their failures, such as bribery, financial problems and even conflicts between employees and employers.
Notably, all these systems used a Trusted Third Party approach, meaning that the underlying companies checked and facilitated the transactions. For a long time, the invention of a digital cash system was viewed as a lost cause due to the failures of such businesses.
Then, Bitcoin was invented in early 2009 by an anonymous programmer or a group of programmers under an alias Satoshi Nakamoto. Satoshi described it as a ‘peer-to – peer electronic cash network.’ It’s fully decentralized, meaning no servers are involved and no central controlling authority is involved. The definition is closely similar to peer-to – peer file sharing networks.
Double-spending is one of the most significant issues any payment network has to solve. It is a dishonest tactic of investing twice the same amount. The conventional approach was using a trusted third party-a central repository-which held the balances and transactions records. Nevertheless, this approach often entailed an expert with all your personal information at hand, practically in charge of your funds.
Every single person needs to do the job in a decentralized network like Bitcoin. This is achieved through the Blockchain-a public ledger of all transactions that have ever taken place within the network, open to everyone. Thus, everyone in the network will see the balance of any account.
The transaction file consists of public keys (wallet addresses) of the sender and receiver, and the sum of coins transferred. The sender always has to sign off the transaction with their private key. All this is nothing more than simple cryptography. The transaction will finally be broadcast on the network but it needs to be confirmed first.
Only miners can validate transactions inside a crypto-currency network by solving a cryptographic puzzle. They take transactions, mark them as legitimate and spread them across the network. Each network node then adds it to their database. This is unforgeable and permanent until the transaction is verified and a miner earns a payout, plus the transaction fees.
Essentially, every cryptocurrency network is focused on the absolute agreement of all participants on balance and transaction legitimacy. When network nodes disagree on a single balance, the system will ultimately break down. There are however a number of pre-built and configured rules in the network that prevent this from happening.
Cryptocurrencies are so-called, because strong cryptography ensures the consensus-keeping process. It, along with the aforementioned factors, makes the idea of blind faith and third parties fully redundant.