How cryptocurrency works

Imagine now; you made a ledger on the internet. You shared this document with everyone, and everyone can write into a ledger. Now, imagine the money exchanged and written in the ledger isn’t money we all know for. No. It is some new made up money.

post5aNow, let us explain:

Cryptocurrency is a digital money that is produced only on the internet. No government is in charge of it.  It is a freely moving currency that no central bank can touch it. It is explained in the article about mining all the questions one can have about this kind of currency (how it is made, how it is controlled..). For now just imagine there are rules about cryptocurrencies that are making it functional, real, valued, but independent currency.

Blockchain

Ledger in which everyone can write and is shared with everyone is a list of transactions. Like banks have a list of transactions from every user, the same way there is a list on the internet, and it contains all the transactions made by people using a specific cryptocurrency. But, to make it fair, to make it safe so no one can control it, the bits of information about this ledger are distributed everywhere. So everyone has the same list, but no one can change it. This ledger is called a blockchain.

Blocks in a Blockchain

As it says above, ledger contains transactions of people using cryptocurrencies. Imagine the list of a thousand transactions like:

Sally pays Ben 10 Cryptocurrencies

Igor pays Johan 100 cryptocurrencies

And so on…

post5bEach transaction is written by the people paying and approved by people receiving currencies. It is done by signatures made of a string of numbers that are depending on persons in transactions, time, number of currencies… So no one can ever duplicate, change, or steal someone’s signature. Now, because this indefinite list of a transaction is so big, it gets divided into blocks that need approval, proof of truth so to say. So, every block is approved by generating a number, let us call it „proof,“ that contains in its formula all the transactions in one block and „proof“ from the last block. The process of generating this “proof” is called mining.

In short…

So, everyone that has access to a ledger will receive from time to time a block of transactions that are validated by this „proof“ number which is always different for each block. That is how people now that transactions are valid, that currencies are valid, and that transaction is valid from the moment you receive it, until forever.

And for the value of a single coin of some cryptocurrency? It is determined by supply and demand on the market. It does not change in the correlation of the paper money, or in the correlation of the value one currency against some other. But the number of each type of cryptocurrency is limited, so there can never be a runaway currency inflation.