O What Makes One Cryptocurrency Different To Another

What is Cryptocurrency?

 

Cryptocurrency has become extremely popular in the last few years, with thousands of new ones being created and different businesses exploring how they can be adapted to fit their needs and markets. But what is a cryptocurrency?

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Why is it special? What does it have to do with the “blockchain”?

In this guide, we’ll start by talking about blockchain technology: what it is, how it works, what makes it special, and what new things are possible using it.

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Since blockchain is the technology that cryptocurrency is built on, it’s an important part of understanding how a cryptocurrency works.

Next, we’ll talk about how a cryptocurrency transaction works.

You know that a cryptocurrency is a digital asset that you can transfer via the blockchain. But what does all of that mean?

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We’ll explain how cryptocurrency transactions work on a basic blockchain and also include a description of transactions on the Lightning Network, a technology built on top of blockchains to make transactions instantaneous and scalable.

Finally, we’ll provide a brief primer describing what everyone means when they say “cryptocurrency mining”.

This section is designed to get you comfortable with the what, why, and some of the how of cryptocurrency mining, enough to feel comfortable when you hear the words. Another guide is provided to give a more in-depth explanation of the ins and outs of how mining works in most of the major cryptocurrencies.

At the end of this guide, you should feel comfortable with the basics of cryptocurrencies: what it is and why it was created.

You will also be familiar with most of the major terms that you will come across in cryptocurrency discussions or articles and know where in this guide to get more details.
 

What is Blockchain Technology?

When talking about cryptocurrencies, you hear the word “blockchain” often.

It’s even cropping up outside the cryptocurrency space as large companies and even government institutions are developing and patenting different types of “blockchain technology”. But what is blockchain technology? How does it work? Why does anyone care? What can it do that we can’t do now?

Introduction to Blockchain Technology


 

You’ve probably heard the words “cryptocurrency mining” before.

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But what is cryptocurrency mining? The term “cryptocurrency mining” was coined to make users think about precious metals.

Someone goes out and does some digging, pulls some gold out of the ground and then they’re richer because everyone agrees that gold has value.

Cryptocurrencies work in a similar way.

When you get down to it, cryptocurrencies are just a bunch of ones and zeros with no tangible use.

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They only have value because people agree that they do. Cryptocurrencies have a lot of parallels to precious metals and the term mining was chosen to take advantage of these similarities and make cryptocurrencies easier for everyone to understand.

Mining is a term used by a family of cryptocurrencies that use an algorithm called Proof of Work for security.

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Cryptocurrency miners “create value” by creating a block in the blockchain, just like gold miners “create value” by pulling gold out of the ground and bringing it to market. Both of them do some work and are rewarded for their effort.

But people only are rewarded for doing something that people agree is valuable, right?

How do I exchange one cryptocurrency to another?

For gold, the “valuable” thing that miners do is gathering gold for people to make things (coins, jewelry, etc.). But what is the purpose of the work that cryptocurrency miners do?

Cryptocurrency miners secure the blockchain by ensuring that the blockchain remains decentralized. The original goal of cryptocurrencies was to create a system that is not under the control of any single person and organization.

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The reason for this is that the creator of Bitcoin, the first cryptocurrency, believed that centralized financial institutions made decisions that hurt the public and wanted to create a way for people to exchange value in a way that is independent of the existing financial infrastructure.

The decentralization of cryptocurrencies is accomplished by making sure that no-one has the ability to control the blockchain by controlling the creation of blocks.

How? By taking advantage of scarcity.

All cryptocurrencies rely upon the fact that a certain thing is scarce and therefore somewhat costly to acquire.

Proof of Work cryptocurrencies use the scarcity of computational power to secure the blockchain. Each block includes the solution to a difficult cryptography problem where the best way to solve the problem is guessing.

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Any user of the cryptocurrency is allowed to participate in a race to find a correct answer to the problem. The process of guessing until a valid solution is found is called mining and the people participating in the guessing game are cryptocurrency miners.

Since each random guess is just as likely as any other to create a valid answer to the problem, a person’s chances of winning the race to a solution is equal to the percentage of the computational power of the network that they own.

For example, if a person has a single computer that they use for mining and the network is made up of 100 identical computers used for mining, then the miner has a 1% chance of creating each block in the blockchain. In established cryptocurrencies, the network is composed of many miners, where no single miner controls a significant portion of the network’s resources.

This protects the network because an attacker would need to gain enough resources to win the race every time, which would be extremely expensive (since they’d need as many computers as the rest of the network combined).

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For example, the Bitcoin network has a power consumption larger than many countries. To effectively attack Bitcoin, a user would need to expend an even greater amount of energy, which would be very expensive (not to mention the cost of the computers doing the mining).

This is a brief introduction to cryptocurrency mining and Proof of Work cryptocurrencies.

For more information about Proof of Work and details of another system called Proof of Stake, see our mining guide.