How does Cryptocurrency work?
Cryptocurrency works through a decentralized technology called blockchain, which serves as a public ledger for all transactions. When someone initiates a cryptocurrency transaction, it gets verified by a network of computers (known as nodes) that make up the blockchain network. These transactions are then grouped into blocks and added to the chain in a successive manner, forming a chronological record of every transaction ever made.
Long answer
Cryptocurrencies operate on the basis of decentralized technology called blockchain. A blockchain is a distributed database where all transactions are recorded and maintained across multiple nodes in the network. Each node holds a complete copy of the blockchain, ensuring transparency and security.
When someone wants to make a cryptocurrency transaction, such as sending or receiving coins, they initiate it using their unique cryptographic keys, consisting of a public key visible to others and a private key known only to them. The transaction details including sender, receiver, and amount get encrypted and packaged into data blocks.
These data blocks are broadcasted to the entire network containing multiple miners or validators—entities responsible for verifying and validating transactions. Miners verify the authenticity of each transaction by solving complex mathematical problems involving hashing algorithms. Once solved, they attach the new block to the existing blockchain after reaching consensus with other nodes through mechanisms like proof-of-work or proof-of-stake.
As newly added blocks become part of the blockchain, they store information about previous transactions chronologically across multiple linked blocks. This ensures an immutable record that prevents double-spending and fraud since altering past records would require immense computational power to change every subsequent block on the chain.
The successful miner’s job is twofold: first, validating new transactions along with their digital signatures; secondly, extending the blockchain while maintaining its consistency and integrity. In return for their efforts and computational resources spent on mining, miners typically receive rewards in the form of newly created cryptocurrencies or transaction fees assigned by users initiating transactions.
Overall, cryptocurrency operates upon the principles of decentralization, cryptographic security, and consensus mechanisms to enable transparent, secure, and efficient digital transactions.