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Cryptopedia

What and Why is a Cryptocurrency?

It’s not a new age unicorn laden fantasy. It is just a digital or virtual currency that uses cryptography for security. A cryptocurrency is nearly impossible to counterfeit because of this security feature.

A defining feature of a cryptocurrency and arguably its most endearing allure is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.

If you take away all the noise around cryptocurrencies and reduce it to a simple definition, you find it to be just limited entries in a database no one can change without fulfilling specific conditions. Money is all about a verified entry in some kind of database of accounts, balances, and transactions. Even if you take physical coins and notes in your regular banks, they are still nothing else than limited entries in a public physical database that can only be changed if you match the conditions of owning the coins and notes.

The only difference is that cryptocurrencies are decentralised and cannot be controlled by single authorities, and that is the whole point of it all.

In his announcement of Bitcoin in late 2008, one Satoshi Nakamoto said he developed “A Peer-to-Peer Electronic Cash System”.

Without getting into the technical details, Bitcoin works on a vast public ledger, also called a blockchain, where all confirmed transactions are included in so-called ‘blocks.’ As each block enters the system, it is broadcast to the peer-to-peer computer network of users for validation. In this way, all users are aware of each transaction, which prevents stealing and double-spending, where someone spends the same currency twice. The process also helps blockchain users trust the system.

Benefits and Drawbacks

Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers.

However, because cryptocurrencies are virtual and do not have a central repository, a digital cryptocurrency balance can be wiped out by a computer crash if a backup copy of the holdings does not exist. Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely.

Many observers look at cryptocurrencies with the hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals, and is outside the influence of central banks and governments.

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