What is Cryptocurrency?
Cryptocurrency is the combination of cryptography and currency. You can imagine cryptocurrency is a digital form of cash and secured by cryptography, so other people can’t have access to your cryptocurrency.
You can spend your cryptocurrency, transfer it to your friends or trade with others via cryptocurrency. Seems like a payment system — PayPal or your digital bank account? Yes. But there’s a distinct difference. When you use cryptocurrency, you don’t need a centralized organization to help you to complete the transaction or transfer your money to any other.
For example, when you want to transfer money to your friend, you rely on bank to do so. First, bank will withdraw money from your account and transfer the same amount of money to your friend’s account. Therefore, bank is an important middleman to connect both sides and take responsibility for maintaining the data flow.
However, when you want to transfer cryptocurrency to your friend, ofc you can rely on centralized organization to do the exactly same process to complete the transaction, but you can also leverage the blockchain technology to help you to complete the transaction without involving centralized organization.
Wait a minute! What is blockchain? Is it something like a gold chain you can wear and prove you’re OG? No, definitely not! I will introduce this in the next session, please just keep in mind that blockchain is a technology to save data without any middleman.
Origin of Cryptocurrency
After reading my previous series of articles introducing the evolution of modern financial system, we can understand the financial system has been transformed from gold standard to fiat system, and this change just make some skeptics not trust the whole system anymore.
In other words, they don’t believe anyone or organization has the power to print money at will. They think increasing the money supply is useless to the economy and it’s a theft from citizens.
Therefore, to retrieve the right and power from central bank, they need to not only create a system without requiring centralized organization’s support on sending, receiving and saving data, but also make the whole system safe enough and make sure each data transmission won’t be intercepted and tampered by anyone or group.
Cryptocurrency Magic Power — Blockchain
So here the blockchain technology comes. Just like I mentioned before, it’s an approach to store and transmit data without any centralized organization help. To put it simply, you can imagine the blockchain is kind of a database and this database is append-only which means you can only add data but can’t delete any data in the network. All data is written and stored in blocks and each block is chronologically created and connected to each other. Therefore, we call it “blockchain”.
So now we know blockchain is like a database and we can store data in the block, but where the fuck do we ACTUALLY save the data? A cloud server in google cloud services or AWS? Hell no! In fact, all the data in blocks are stored in thousands of nodes (probably thousands of personal PCs) and this way of storing data is called distributed ledger technology (DLT). Frankly speaking, all of the transaction record in blocks are copied and pasted in thousands of nodes once the block has been created and all of them can read the record but not tamper them.
Let’s take a pulse and see an example first. Mary would like to borrow money from Jimmy, so Jimmy just sends 5 coins to Mary via blockchain, then this transaction record is written in the block A and broadcasted to all of the nodes in the network, and every node received and stored the info of Jimmy & Mary’s transaction record within block A.
You might have heard cryptocurrency is decentralized, and now you know the reason. Decentralization means there are thousands of nodes storing data & maintaining the system together instead of only one big data center centrally managing all of transactions data.
Today we know how to leverage blockchain technology to store the data in the field of cryptocurrency , but where does a block come from? Who can have the right to first write data in a newly-created block? Yes, it’s called consensus algorithm. It takes time to explain it, so please allow me to break it down for you next time !