How does crypto work

Cryptocurrency is designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.

Crypto’s existence form: Non-physical

Cryptocurrency exists in the non-physical form because all the cryptocurrencies run on the digital distributed ledger, which is well-kown as a blockchain.

Main components of how crypto work: distributed ledger, cryptography, immutable, decentralised

This digital ledger is a kind of computerized database that uses strong cryptography to secure transaction records.

Cryptography, as mentioned above, refers to the practice and study of techniques for secure communication in the presence of adversarial behavior. More generally, cryptography is about constructing and analyzing protocols that prevent third parties or the public from reading private messages.

Due to the usage of distributed ledger and cryptography, the transaction on the blockchain is immutable, and cannot be forged, falsified, or double-spend. Moreover, the distributed ledger is enforced by a disparate network of computers, bringing decentralized feature for cryptocurrencies.

Crypto working consensus mechanism: “Proof of work” and “proof of stake”

When it comes to blockchain (distributed database) like Bitcoin and Ethereum, the network’s nodes must reach an agreement on the network’s current state. This agreement is achieved by utilizing consensus mechanisms.

The most common consensus mechanisms are “proof of work” and “proof of stake.” Blockchains like Bitcoin and Litecoin use a “proof of work” consensus mechanism. “Proof of work” requires participant nodes to prove that the work they have completed and submitted qualifies them for the right to add new transactions to the blockchain. However, the entire mining mechanism of Bitcoin requires high energy consumption and longer processing time.

The “proof of stake” blockchain consensus mechanism is a low-cost, low-energy consuming alternative to the PoW. It involves allocating responsibility in maintaining the public ledger to a participant node in proportion to the number of virtual currency tokens held by it. However, this comes with the drawback of incentivizing crypto coin hoarding instead of spending.