DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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With all the topics that are trending on social media these days (or the past few years actually), Cryptocurrency has been one of the most eye-grabbing because of all its glamor. All this glamor came for one reason alone: Money.
Although the Crypto world is something that is known for its high risks and high returns, there are things that you can do to ensure that the risk factor is as low as it can get for you. So if you are already a trader in the Crypto world, our various articles will help you better your experience.
But this particular article is not for regular traders like you. This is another article in the Introduction To The Crypto World series, where we are explaining every basic thing a crypto trader should know about if they want to trade in cryptocurrencies.
That is the reason why you will be learning how cryptocurrencies work in this article along with some other basic things and terms you should know to understand the technicalities smoothly. So let’s get started with the definition of a blockchain.
Blockchain is a database that is used by computer nodes to form a digital network that works as a decentralized platform that stores information about the Crypto system and its transactions
Whenever you learn something new it becomes important that you are well equipped with knowledge that helps you understand that thing thoroughly. So, in order to have a good understanding of how cryptocurrency works, it is important that you are aware of the following concepts.
Blockchain is nothing but a ledger that has no controlling authority keeping a record of all the transactions of the user. You can think of a blockchain as a series of blocks put together where each block contains information about your crypto transactions. So, when any transaction is made in crypto, the data regarding the same is stored here.
Blockchain technology plays a very important role in cryptocurrencies like Bitcoin to maintain all the transaction records with security. All the information or data that is present on the blockchain is inalterable which means it can neither be changed nor removed. Also, all the transactions that are recorded on the blockchain are secure.
Blockchains are basically a form of public ledgers. To make it simple, ever since the cryptocurrency was established, all the transactions that were made are recorded on this public ledger. However, the identities of the owners of coins are safeguarded as the system ensures the privacy of owners with various cryptographic techniques.
Public ledger also takes care of the respective digital wallets calculating the expendable balance accurately. One can easily check and keep track of all the new transactions that take place ensuring that coins used for the transactions are currently owned by the sender.
Mining is nothing but the process by which coins are generated and transactions are verified. It involves innumerable computer systems worldwide that carry out the necessary mathematical computations and validate the transactions by solving complex problems. In this process various transactions are confirmed and are then added to the public ledger.
The process of mining is open to everyone so that anyone can take part in validating the transactions and be a miner. As the miners solve the complex problems, blocks are added to the public ledger in a sequence such that the first miner adds a block and the others follow. This is how blocks are added to the public ledger. Apart from that, the coins get their value from this mining process.
To put it in simple terms, miners solve those complex mathematical problems and keep adding blocks or you can say transactions to the public ledger hoping to win coins as a reward. So, this process of gaining coins by adding transactions to the ledger is mining.
A wallet in cryptocurrency is similar to the wallets that you may be familiar with from platforms like Paypal and more. Here, there are two types of wallets; one is in a physical form that looks like an USB while the other is available over the internet either on an app or a website.
These wallets are used to store your cryptocurrency and also used for making transactions or you may say exchange. It consists of a public key that acts like an address to your wallet that is shared with others for accepting transactions and a private key that is nothing but an encrypted code that is unique to every user and is not to be shared with anyone as it is used as an access to your cryptocurrency wallet.
To understand the working of cryptocurrency, firstly you have to understand what is blockchain and what is cryptography. Now you are well aware of all the terms, Blockchain, Public ledger, mining and wallet. To learn about how cryptocurrency works, you can just imagine how the banking system works.
The way we use debit cards and all the transactions get recorded on bank servers, the same happens with cryptocurrency. The major difference between both of them is that cryptocurrency is decentralized. The similar part between them is that both systems allow the users to send or receive the money, eventually all the translations are recorded and all this happens electronically.
Let’s look into the working of cryptocurrency. When you do a transaction from your wallet, the first step itself begins with using the wallet software. You transfer the money from your wallet which is linked with your account, so your account in technical terms has a public address.
While a transaction is being processed you do need a private key, and that private key is nothing but a password. Now after you have transferred the funds, all your transaction details will be uploaded. If you are using a cryptocurrency which uses a public ledger like Bitcoin, then the other people on the network can see the transaction history, but the sender's details will be encrypted.
Just like we have our account numbers in a particular bank, you own a particular set of keys or unique keys. So at one time, along with you, there are many people who are performing an exchange, in short, doing a transaction.
These whole lot of transactions performed at one time is termed as “block”. Blocks consist of all the transactions being added to the ledger at a particular period, and this series of blocks goes on adding. This addition of one block after another is termed as “blockchain”, you can see they are chains of blocks. These blocks of transactions are sequentially added by miners.
There are many blockchains or networks that make use of private ledgers, so users get privacy including their transaction history. This explanation of the working of cryptocurrency sums up the working of Bitcoin.
There are many coins that work in a completely different manner. Their whole system is different and some of them work on a private ledger, and there are some which don’t even use blockchain. We understand that you’ll be confused about how their system works. But that’s some different story to start with, we will get back to that in another article.
Speaking about the privacy you get on a public ledger, you will be pseudo-anonymous. Your personal details will be hidden, only the transaction details will be open to the public. There are many coins that work on the explained system.
Now that you are familiar with all the cryptocurrency-related concepts and how it works, the question that has to be asked is why do we need another form of currency when we already have our traditional currencies like Dollars and Euros.
There have to be some benefits right? Well, cryptocurrency does offer certain advantages over traditional currency and moreover, it offers a lot more utility other than being just a form of currency. Out of many, let’s focus on the three most important benefits offered by cryptocurrency.
The whole objective of creating a virtual and digital currency was to decentralize the money we use. Currently, the value of a dollar or any other currency is decided by the government and everyone else just has to trust the government. Otherwise, it’s just a piece of paper with some number written on it, right?
Cryptocurrency eliminates the need to trust any centralized body for the value of the currency and instead makes it decentralized and public. Every transaction happening is recorded on one single public ledger and there are numerous copies of that ledger already in the system. Anyone who is part of that cryptocurrency network has a copy of the ledger.
Therefore, the benefit of being a decentralized currency is that there is not just one entity that can affect the value of a currency. Instead, it is open source and deals only with two people trying to complete a transaction without any interference from a third party.
Another key benefit of a cryptocurrency over traditional currency has to be how secured cryptocurrencies are. Let’s understand how cryptocurrencies are secure.
Every time you make a transaction of cryptocurrency, the transaction details are stored in the form of a block. The block contains details like what amount you paid and to whom. A unique identifier of your transaction called “Hash” and hash of the previous transaction of that cryptocurrency is stored on one particular block.
As you can see, every transaction on that blockchain is stored in the block with its unique hash and also the hash of the previous transaction. Therefore, every block is linked to the corresponding blocks in a way.
Therefore, even if any fraudster wants to show a fake transaction, it’s impossible to change the data in every single block present in the blockchain. Otherwise, a single block with miss-matched details can easily be caught since the majority of blocks have different data than the one tampered with by a fraudster.
On the other hand, we have seen enough cases of people hacking into bank systems and stealing people's money. Moreover, cryptocurrency is a currency that is encrypted using cryptography. Thus, cryptocurrency is 10 times more secure than traditional currency.
As you know, cryptocurrency is not controlled by any government but by the people using the network in a decentralized manner. As there are no border limits for cryptocurrency, it can be transferred internationally to anyone. Additionally, you can transfer any amount of cryptocurrency you want to.
Also, as it's a global currency, you no longer have to worry about exchange rates to convert your currency and you don't have to pay any interest fees to banks. You do need to pay transaction fees which depend upon the cryptocurrency you are transferring. But these fees are minimal in the case of most cryptos.
So now that you understand what Cryptocurrency is and how it works, you can start investing in the modern form of currency. Some people might think Crypto is not going to be a long-term thing but so far it has mesmerized anyone who has tread upon its path.
So if you are an investor, looking to invest your money in a place that can give you high returns, then Crypto is the way to go. Just make sure you do all your research regarding whatever you will be trading in and if you don’t understand anything, then that is why we are here with numerous articles to make the concept of Cryptocurrency simpler for you.
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