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what and how does cryptocurrency work

Do you remember the days where the exchange of value was either hand in hand or through the centralized system (bank transfers)? But, those are the former days. Now, this is the era of “Digitalization”. Everything is available right at your fingertips. Furthermore, with the reap in technology one such concept of digitalization is “Cryptocurrency”. 

So, What is Cryptocurrency?

It is an encrypted and decentralized virtual currency where the value exchanged is peer to peer. Besides, it works through a distributed ledger called Blockchain and each transaction is confirmed through Mining.

Many private companies use virtual currencies as a medium of exchange because they are independent of any centralized authorities. Bitcoin is the first released open-source decentralised cryptocurrency which is first used in the year 2009. Besides, with the release of bitcoins, about 4,000 altcoins have emerged.

Cryptocurrencies use a tremendous amount of computing power to record the transactions as well as reviews of the newly created or received cryptocurrencies. Consequently, these govern the values, integrity and security.

In order to know the functioning of cryptocurrencies, you need to be familiar with its basic terms.

Public ledger

When a transaction is confirmed they are automatically stored in the public ledger. The identities of the owner are also stored and encrypted. It will make use of some legitimate techniques to ensure security across the transaction.

The ledger uses a digital wallet to calculate the amount spent. Cryptocurrencies use a Digital wallet to store currencies. It will also ensure that the value is sent by the sender itself.


It is the transfer of value between two peers through a digital wallet. The transaction must pass through a public ledger to receive the confirmation. These wallets use an encrypted signature to approve a transaction.

It will also provide a mathematical proof to ensure that the transaction has come from the owner. It takes about ten minutes for a miner to confirm a transaction and will add them to a public ledger.


The transactions get confirmed through a public ledger called mining. To add a transaction to the ledger, a miner will have to solve a complex mathematical problem. It is an open transaction platform. So, any miner can confirm the transaction.

Firstly, a miner should solve a puzzle and only then a miner is allowed to add a block to the ledger. The public ledger will ensure that no block is altered at one’s own concern.  Addition of a block means a confirmed transaction. The process of mining will provide value to the coins by utilizing proof of work system.

Proof of work uses hard to use functions called hashes this will prevent the exploitation of cryptocurrencies.

Now, how does cryptocurrency work?

A step by step guide on how cryptocurrency works,

Private keys

  • Cryptocurrency holders are equipped with the private keys in order to authenticate the user identity
  • A user is capable to create their own private keys. It can be up to 78 digits long. You can also use a customized number generator to create a private key
  • In fact, a user is not allowed to spent or transact the money without a private key
  • cryptocurrencies offer paramount security during the process of transaction
  • Losing your private key is like a thief stealing your cash
  • Although you can open a new account, there will be no chance to restore your old cryptocurrencies
  • So, all the cryptocurrency savvys out there, keep your private keys safe and secure
  • You can store your private keys in digital platforms


  • A blockchain acts as a master ledger. This will store all the information to validate the ownership rendering a transaction
  • The entire cryptocurrency transaction would encrypt the identities, date of the transaction to store a finite number of transactions
  • Identical blockchains are stored in the network through a node
  • Miner will run the decentralized transactions by solving complex mathematical problems
  • In fact, a transaction is only confirmed only when it is added to the blockchain
  • As earlier said, Once the block is added to the ledger it cannot be altered or irreversible
  • Cryptocurrencies don’t afford refund or chargebacks. Although, some of the newly developed cryptocurrencies offers chargeback
  • Either sender or the recipient isn’t allowed to use the cryptocurrencies during the lag time (It is the time between the initiation and finalization of the transaction)
  • Lag will prevent double-spending. It also shields the currencies from manipulation and duplication of the cryptocurrency codes

Cryptocurrency Exchange

Cryptocurrencies are only exchanged through private transfers. Unlike other currencies, You can not perform liquid transfers. whereas newly developed cryptocurrencies like ethereum and ripple are exchanged through secondary systems.

These are also exchanged for fiat currencies through an online market. Each currency has a separate variable exchange rate for each world currency. 

Finite supply

Most of the cryptocurrencies are defined by finite supply. This contains a set of codes that will describe the restrictions for a precise number of units. Moreover, it may become difficult for a miner to generate cryptocurrencies until they reach an upper limit. Cryptocurrency is an inherent supply as gold and any other precious metals.


  • There will be no chance of scarcity. The source codes will display the number of existing units
  • It is the most reliable means of exchange without depending on any central authorities
  • Self-controlled transaction process
  • Even miners are benefited as they are presented with the stake of benefit for keeping the transaction records
  • Robust and private 
  • It is a Decentralized network. This makes it harder for the governments and hackers to extract the transaction information
  • There will be no additional transaction fees
  • It is Cheaper than any other transactions
  • There are No extra costs for international transaction


Cryptocurrencies are feasible systems that may alter the financial system. As they are independent of any centralised authorities they are beneficial for private groups and businesses. For the concept of cryptocurrencies to progress, it will take certain facts into consideration such as democratic principles.

Cryptocurrencies are already under the use in countries like Japan, Hong Kong, Switzerland, Singapore, Germany many other countries. Very soon, with the technological progress cryptocurrencies are going to take all over the world.

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