What is a CryptoCurrency

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What is a cryptocurrency?

It is a digital currency, or virtual money based on a peer-to-peer, decentralized exchange network protected by cryptography.

This means that, in the first place, it isn’t a material currency, but rather that everything works virtually from our computers and the Internet. Second, it is protected by encryption, hence the name “cryptocurrency”. This is a way to secure the system and the transactions through mathematical algorithms which convert the information in an encrypted block, only readable with the correct key, with a level of encryption that’s impossible to decipher with today’s known technology.

Coins are not actually units as we may think, but pieces of information, specifically they’re exchanges of keys which are recorded on a public accounts book which everyone can see and check, and which is is almost impossible to fake. To put it simply, what actually happens when you give someone else a coin is that you sign a transaction with your private key, transferring a value (“coins”) to another person’s direction. These signatures make up chains that are verified and confirmed by an entire community of people who use their own computers to verify that the transactions are correct.

As complex as the system may seem, it is actually very simple, and enough technology has been developed to make a cryptocurrency payment as easy as paying with your code-protected credit card.

The innovation and main difference of cryptocurrencies as compared to central money is, in the first place, cryptocurrencies are neither saved nor controlled by any central bank or State. In this system, you own all your money, and the system is secure thanks to peer2peer technology. Secondly, counterfeiting is currently unfeasible.

Thus, cryptocurrencies give us immunity to interference and manipulation by central banks and return us our freedom of economic management

How are notes and balances secured?

Satoshi’s great contribution to humankind is the blockchain. It consists of a p2p program which collects all the transactions done in a period of time in a block and joins them together in “chains”, resulting in something resembling a ledger containing all transactions, which are then distributed and verified to avoid fraud.

In order for a block to be added in the chain, it must be submitted to automatized voting among all the computers connected to the net, so they can determine whether the block contains valid information or not. Once the node accepts a block as valid (which means that all transactions contained are true), other nodes confirm its validity by building the next blocks on the same chain. Therefore, each block maintains a mathematical relationship with the previous block and the future one. This whole process has its foundations laid in the mathematical algorithms specially designed for this purpose.

The blockchain provides the world’s first decentralized, incorruptible system for registering any financial or legal contract, so it’s already being used for multiple purposes, and new ones will gradually appear. Each computer which downloads the program acts as a notary, and all computers working simultaneously decide according to mathematical laws.

How are coins created?

The software released for Bitcoin was designed in such a way that only 21 million coins could be created. For Faircoin, there are 50 million coins plus those which are generated through the minting system explained below.

There are different ways to create these coins. The most common and widespread methods are POW and POS. Both are designed with a feedback system, ie, in order to get coins from the system, you must contribute to making the system work properly. Let’s take a closer look into the way this functions.

POW (Proof Of Work)

This is a validation system based on work, also called mining. It is dependent on computing power. Miners are those who participate in the network, contributing with their computer and the energy expenditure derived from mining.

Mining itself is performed on different nodes working in unison through the POW infrastructure. The more computing power supplied to the system, the more likely it is for a block to be completed.

For each block completed and added to the blockchain, the creator node is awarded a certain amount of coins, in the case of bitcoins, 25BTC.

This system values the work of the mining community in completing the blocks, and compensates it with coins. This is the system used for bitcoins and is known as MINING.

POS (Proof Of Stake)

In this case, the system validation is based on demonstrating that you own the coins by using “money age”. New coins are created once you prove that you have been saving a certain amount for a certain time, and through this savings, you also contribute to the network’s security. This method began with Peercoin and is also currently used in Faircoin. The process is known as MINTING.

Both methods are widely used by different cryptocurrencies, separately or as a hybrid. However, POS arose to overcome some disadvantages of POW: on the one hand, there is the problem of energy consumption. As the system has grown, along with the number of transactions, it is increasingly difficult to mine a block and it requires more and more computing power, therefore becoming an ecological and economic issue.

On the other hand, since transactions are validated by miners, if 51% of the computing power of mining nodes were to unite, they could seize control of transactions and therefore of the registered coins.This is known as a 51% attack.

In opposition to this, POS does not require large energy resources for minting. Anyone, with just a computer and an open purse, can mint (see specifications below), so it’s a much greener way to maintain the system. Also, the only way a monopoly could arise, as in the case of POW, would be if someone were to own more than 50% of minted coins — which would be meaningless in terms of economics, for the owner to prejudice their own capital.

In conclusion, POS encourages savings and thus helps generate sustained growth in currency value which will be gradually fed by all cooperative members.

How are cryptocurrencies used?

To use cryptocurrencies, you first need a virtual wallet. There are many models, each with its own peculiarities, and can be local, as in mobile or computer apps, or online through a server. Each has different features. You can download one for FairCoin here.

Wallets are good for keeping your coins safe and making transactions, both to receive and send money, by just entering a receiver address.

It is important to note that any transaction made is impossible to reverse, as it is recorded in the blockchain; therefore, users need to be careful! Here are some safety tips.