Cryptocurrency is a decentralized digital currency that uses encryption to generate money and to verify transactions. In simpler terms, it’s an alternative to traditional currencies, which are backed by a centralized government like the US Dollar (USD).
Cryptocurrency may seem like a daunting subject at first, but the core concepts surrounding cryptocurrency are pretty straightforward. Below, we will breakdown the cryptocurrency basics to explain cryptocurrency in a simplified way. See our how cryptocurrency works page for a breakdown of how things like transactions and mining work.
Understanding Cryptocurrency: An Analogy
Imagine a world where, instead of money, we used giant carved stones as our currency. Further, because these stones are so large, we kept them in a public place where everyone could see them and anyone could check who owned which stone.
When you wanted to buy something, you would simply tell everyone that you were transferring ownership of one of your rocks to someone else. Then, everyone would know that you no longer owned that rock, and you couldn’t spend it again.
Further, if anyone ever wanted to make a new stone, all they had to do is spend time carving it so that people recognized that is was the same kind of valuable stone as all of the other ones. The time spent carving the stone makes it valuable and worth something to other people in the rock-spending community.
A General Description of Cryptocurrency
Cryptocurrency is a lot like the theoretical rock currency described above:
- Every cryptocurrency has a public ledger that contains the past and present ownership of each coin.
- If you want to make transaction, you simply broadcast to the cryptocurrency’s network that you’re transferring ownership of some cryptocurrency of yours to someone else.
- The network then spends computational power on both verifying your transaction (that you do own the cryptocurrency your spending and that you haven’t spent it before), and adding it to the ledger.
- In the process, this computational time and effort creates new cryptocurrency as a reward to the community members who helped make the transaction possible.
There are many specific cryptocurrencies currently becoming popular and widely-used as currencies, commodities, and electronic payment systems. The most commonly-used cryptocurrency is, by far, Bitcoin. However, other cryptocurrencies (especially Litecoin) are growing in both public acceptance and value.
Next: How Cryptocurrency works