What are bitcoins and other cryptocurrency?

Bitcoins and other cryptocurrency

In order to understand well what cryptocurrency are, for example bitcoins, we suggest to first consider what they are in the current currency, what money is. It is a commonly used, liquid means of exchanging goods and services, most often linked to the existence of a given country.

Money is in the form of coins and banknotes, but at present, they are mostly digital records on our bank account. The Bank is a place which, in a very simple way, is a great digital settlement book in which the account balances of its customers’ accounts and transactions between them are entered.

Did you know that you don’t know exactly who created the bitcoin?

It is only known that it is the work of a person or group of people who hide under the pseudonym of Satoshi Nakamoto. A lot of theory has already emerged on this subject, but unfortunately the riddle is still not solved.

Bitcoin is also a fluid means of exchange, which we can pay for more and more things!

Every now and then we hear that more institutions, shops or other companies are beginning to accept bitcoin. It is also a currency that has no physical form and can be sent directly to any place on earth in the shortest possible time. This has many advantages over e. g. international bank transfers, where money has to go through several banks on the way, and thus be recorded in several virtual accounting books.

Another important difference between cryptocurrency and currencies is the aforementioned bank. Cryptocurrency, they do not have a Bank, there is no such thing as „BitCoin Bank”.

So how to get information who has how many bitcoins?

The innovation of bitcoin is that it is in a sense a bank in itself. A self-standing settlement book which contains information on the holdings of all users and the history of transactions between them. In order to open a cryptovalent account, it is enough to download the application and generate a login and password. The account is completely anonymous and there are no formal requirements for the account holder.

At this point the meaning of the term „crypto” is revealed to us, because the above mentioned information is encrypted inside bitcoin. The way encryption takes place is a revolution in information technology – Blockchain technology.

Let’s try to illustrate the operation of this technology as building brick towers. The tower symbolizes here the current state of cryptocurrency accounts (who has a lot), seen by all bitcoin users. Each new block contains information on all new transactions that will change current account balances.

A new block must be encrypted to match the tower and fitted with an appropriate encryption. Once this is done, it will be added to it and, as a result, the new transactions it contains will take place. Bitcoins will be replaced in the system.

If we tried to remove or replace the block from the bottom of the tower, the whole structure would be destroyed. Because each subsequent block in the tower has a coded information from the previous block. Replacing the pad with another piece of information (different cipher) would result in it not matching the previous pad. Moreover, they would separate all the blocks that follow it.

In the result, the information contained in this tower would be considered untrue. Therefore, blockchain technology can be considered as a safety innovation.

So it’s good, and who will encrypt the next blocks to our tower? and how does this process proceed?

People who work cryptography are called „miners”, their computers, which perform calculations are called „excavators”, and the whole process is called „digging”, digging bitcoin. This versatile allusion to the mining industry is supposed to refer to gold mining, because the award for encrypting subsequent transactions for miners is to be bitcoins.

Moreover, it is in this way that new bitcoins are formed and put into circulation. At this point it is worth noting that excavators are expensive and complex computers with very high computational power.

Only from where it is known to which miner should be awarded in the form of bitcoins?

In order to explain this issue without going into the informational details, we will try to refer to the comparison again. Let’s imagine that the encryption process of another bitcoin block is a great lottery.

The excavators in our example are machines that generate huge amounts of vouchers for this lottery – the more powerful the excavator’s computing power, the greater the miners’ chance that it will generate the winning fate. When this happens, a new block, with all the information contained in it, is at the top of the tower. After that, new transactions go to the bitcoin system, another lottery starts to encrypt the block and so every 10 minutes.

Interesting in this system is the fact that the award in the form of a cryptocurrency ensures the existence of the entire IT base, together with its enormous computing power, at the same time ensuring the flow of bitcoins to the circulation.

Now let us come back to the banks for a moment.

As we have already mentioned, they are a place that we compared to virtual billing books. All customer data of a given bank are in one place, on its servers. In other words, traditional currency transactions are centralized in the bank. At this point, the question arises: what can happen if there is a hacker attack on a bank? Nowadays, banks are under constant pressure from network burglars.

Now let’s ask ourselves: what happens if the hackers attack a bitcoin?

This reveals another very important, innovative feature of blockchain technology, which can be used in many other areas, not only in payments. As mentioned above, the blockchain contained in bitcoin has all the information about the status of all users.

At the same time, this information is recorded in bitcoins, wallets and excavators – hundreds of thousands of places in the world. It is like in every place in the world where there is a bitcoins an identical tower of blocks.

In other words, it is a decentralised system. The possibility of falsifying data or attacking hackers is therefore unimaginable. When a miner adds another block to the string, this information is updated everywhere. All information about block numbers and the transactions contained in them is clear!

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