What is a cryptocurrency

Cryptocurrency is a decentralized digital currency that provides security through cryptography. It can work any intermediaries like banks and payment systems.

The decentralized nature of cryptocurrencies allows for peer-to-peer (P2P) transactions between users. However, instead of physical wallets or bank accounts, cryptocurrency holders get access to their assets through crypto wallets or crypto exchanges.

Many people are used to saying that cryptocurrency is “stored” in wallets. In reality, a cryptocurrency is never in a crypto wallet or on an exchange - it always remains on the blockchain . A cryptocurrency exchange can simply store private keys that provide access to these funds.

The first and most famous cryptocurrency is bitcoin . It was created in 2009 by an unknown person or group of people under the pseudonym Satoshi Nakamoto. Since then, thousands of other cryptocurrencies have appeared with their own unique characteristics and tasks.

Like traditional fiat currencies, cryptocurrencies can be a medium of exchange. However, over the years, many additional use cases for cryptocurrencies have emerged, including smart contracts, decentralized finance (DeFi), savings, governance, and non-fungible tokens (NFTs). 

How do cryptocurrency wallets work?

We have already mentioned that the security of cryptocurrencies is provided by cryptography, but what does this mean? Cryptocurrencies use advanced mathematical algorithms to ensure the security of transactions and protect data from unauthorized access and manipulation. These algorithms perform two main functions: maintaining user privacy and authenticating transactions.

Transactions on the blockchain are public, and addresses (public keys) provide partial anonymity. This means that transactions are displayed on the blockchain, but the identities of the participants are not easily identified. This is how cryptographic techniques work, such as hash functions and digital signatures.

Cryptocurrency achieves autonomy thanks to a distributed network of computers (blockchain). It acts as a decentralized digital ledger that stores transaction data on specialized computers on the network.

Each of these computers ( nodes ) keeps a copy of the ledger, and the consensus algorithm protects the blockchain by rejecting fake or invalid copies. This distributed architecture increases the security of the network: it does not have a single point of failure like a bank vault that attackers can access.

Cryptocurrency users can transfer funds to each other directly. Typically, the sender initiates the transfer by creating a digital signature using their private key. The transaction is then sent to the network, where the nodes confirm it by verifying the digital signature and making sure the sender has sufficient funds.

After verification, the transaction is added to a new block, which is then entered into the existing blockchain. This system may seem complicated, but miners do all the work, so ordinary users do not need to worry about it.