The Cryptocurrency Basics
To understand how cryptocurrency works, you’ll need to learn a few basic concepts. Specifically:
Public Ledgers: All confirmed transactions from the start of a cryptocurrency’s creation are stored in a public ledger. The identities of the coin owners are encrypted, and the system uses other cryptographic techniques to ensure the legitimacy of record keeping. The ledger ensures that corresponding “digital wallets” can calculate an accurate spendable balance. Also, new transactions can be checked to ensure that each transaction uses only coins currently owned by the spender. Bitcoin calls this public ledger a “transaction block chain.”
Transactions: A transfer of funds between two digital wallets is called a transaction. That transaction gets submitted to a public ledger and awaits confirmation. Wallets use an encrypted electronic signature when a transaction is made. The signature is an encrypted piece of data called a cryptographic signature and it provides a mathematical proof that the transaction came from the owner of the wallet. The confirmation process takes a bit of time (ten minutes for bitcoin) while “miners” mine. Mining confirms the transactions and adds them to the public ledger.
Mining: Mining is the process of confirming transactions and adding them to a public ledger. To add a transaction to the ledger, the “miner” must solve an increasingly-complex computational problem (like a mathematical puzzle). Mining is open source so that anyone can confirm the transaction. The first “miner” to solve the puzzle adds a “block” of transactions to the ledger. The way in which transactions, blocks, and the public blockchain ledger work together ensure that no one individual can easily add or change a block at will. Once a block is added to the ledger, all correlating transactions are permanent, and they add a small transaction fee to the miner’s wallet (along with newly created coins). The mining process is what gives value to the coins and is known as a proof-of-work system.