Today cryptocurrencies have become a global incident known by many people but understood by few. In 2018 you will have a tough time finding a serious bank, firm, software company, or government that hasn’t researched cryptocurrencies or started a blockchain project. Many of us often need to understand the mechanism. So let us walk through the whole story of what are cryptocurrencies. The man who invented Bitcoin in 2008 was Satoshi. Bitcoin is a peer-to-peer electronic cash system. To realize digital cash you would need a payment network with accounts balances and transactions.
That is easy to understand however one major problem every payment network has to solve is to prevent double-spending. This means, to stop one entity from spending an equivalent amount twice. Usually, this is done by a Central Server which keeps records of all the balances. Whereas in a decentralized network you don’t have this server so you need every single entity of the network to do this job. Every peer in the network requires to have a complete list with all the transactions in order to check if future transactions are valid or if there is an attempt to double spend is made. Let us see that how these entities keep a consensus about these records. If the peers on the network do not agree about one single minor balance, everything breaks. They need an absolute consensus. Nobody knew how to achieve this until Sato proved it was possible. Cryptocurrencies are a key part of the solution. To explain this, we will note the transactions on the network. The transaction is a file that says that John gives X Bitcoin to Jane and is assigned digitally by Mark. Once it has been signed, the transaction is broadcasted to the network by sending from one peer to each other peer. This is the standard P2P technology. After an amount of your time, the transaction gets confirmed. Only miners can confirm transactions and this is their job in a cryptocurrency network. They take transactions, stamp them as legitimate, and spread them within the network. When a miner confirms a transaction every node has to add it to its database.
That means it has to become part of the blockchain. For this job, the miners are rewarded with cryptocurrency, for instance, Bitcoins. Anybody can be a miner. They just got to use a number of their computer’s
power to qualify for the task. Every miner competes to solve a cryptographic puzzle and after finding a solution, a miner can confirm the transaction and add it to the blockchain. While as an incentive to do this, they, then receive a payment from the network in the form of a cryptocurrency. This is the method by which a network of independent actors is economically incentivized to take care of the authority of the transaction history. So that is the gist of Cryptocurrencies.
These are the key to the complex digital cash problem which Satoshi solved. He kept in mind that how to maintain integrity and consensus across independent and potentially malicious actors. Cryptocurrencies are fundamentally the monetary benefit offered to anyone willing to maintain the network secure.