What Is Cryptocurrency? – dummies

By Tiana Laurence

Part of Blockchain For Dummies Cheat Sheet

Cryptocurrencies, sometimes called virtual currencies, digital money/cash, or tokens, are not really like U.S. dollars or British pounds. They live online and are not backed by a government. Theyre backed by their respective networks. Technically speaking, cryptocurrencies are restricted entries in a database. Specific conditions must be met to change these entries. Created with cryptography, the entries are secured with math, not people.

Restricted entries are published into a database, but its a special type of database that is shared by a peer-to-peer network. For example, when you send some Bitcoin to your friend Cara, youre creating and sending a restricted entry into the Bitcoin network. The network makes sure that you havent not the same entry twice; it does this with no central server or authority. Following the same example, the network is making sure that you didnt try to send your friend Cara and your other friend Alice the same Bitcoin.

The peer-to-peer network solves the double-spend problem (you sending the same Bitcoin to two people) in most cases by having every peer have a complete record of the history of all the entries made within the network. The entire history gives the balance of every account including yours. The innovation of cryptocurrency is to achieve agreement on what the history is without a central server or authority.

Entries are the representation of cryptocurrency.

Cryptocurrencies are generated by the network in most cases to incentivize the peers, also known as nodes and miners, to work to secure the network and check entries. Each network has a unique way of generating them and distributing them to the peers.

Bitcoin, for example, rewards peers (known as miners on the Bitcoin network) for solving the next block. A block is a group or entries. The solving is finding a hash that connects the new block with the old one. This is where the term blockchain came from. The block is the group of entries, and the chain is the hash. Hashes are a type of cryptologic puzzle. Think of them as Sudoku puzzles that the peers compete to connect the blocks.

Every cryptocurrency is a little different, but most of them share these basic characteristics:

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What Is Cryptocurrency? - dummies