What is cryptocurrency?

Ole

Knowledge database

27.04.2019

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Cryptocurrency is a word you only hear more and more often, but there are still many who do not fully understand what cryptocurrency is, how it works, and what to do about it. So what exactly is cryptocurrency? In principle, it is a type of digital means of payment that uses cryptography and blockchain technology to secure transactions against tampering.

The fact that the cryptocurrency uses cryptography means that an algorithm is used to confirm that the information sent with the transaction is correct, that it has not been changed and that it has been approved by the person checking the transaction. It may sound a bit technical, but the point is that it is virtually impossible for a third party to influence the transaction from the outside without having access to the personal keys of the owner of the cryptocurrency.

Fully decentralized – all transactions are stored in blockchain

This means that if you send a transaction with a cryptocurrency, no one can change, stop or in any way affect the transaction, as opposed to how banks are free to stop transactions or block bank accounts by law. Therefore, when you own a cryptocurrency, you are a real owner of that currency, and the only way for a third party to access the currency is by knowing the owner’s “password”, also known as a private key.

The actual wallet with cryptocurrency can be stored on any device that has storage space, such as on computers, on smartphones or on memory chips. The wallet needs a key to work, and most people choose to use a password to encrypt the key to gain an extra layer of security on their cryptocurrency.

What is the advantage of a cryptocurrency over a regular currency?

Supporters of cryptocurrencies believe that there are many great advantages of digital cryptocurrencies compared to regular currencies like US dollars or Norwegian kroner. The main difference is that cryptocurrencies are decentralized and thus it is not a central body that owns or controls the currency. Instead, there are many thousands of different actors, all of whom control the blockchain and the cryptocurrency by continuously solving the cryptographic codes.

Since there are so many people involved in solving the cryptographic challenges of the popular cryptocurrencies, it is virtually impossible for a single player to get more than 51% of the network itself, which is necessary to take control and change transactions or information. As the owner of a cryptocurrency, you can thus be sure that you have full control over your currency, as long as you do not rotate your private key away or lose both the storage medium with your wallet plus any backups.

Predictable inflation gives you a predictable investment

Another great advantage of a cryptocurrency is that there is a predictable inflation on the currency. With the help of the government, Danmark Bank can decide when they want to print more money, while cryptocurrencies such as Bitcoin, on the other hand, must comply with inflation criteria set by the network and maintained and cryptography. There are many who believe that this gives owners of cryptocurrencies a much more predictable investment, as inflation cannot be changed without further ado. Bitcoin, for example, has never changed its inflation plans and still sticks to the original inflation launched with the network.

Many alternatives – hence the pros and cons

It is worth mentioning that the explanation of how cryptocurrency works and why many believe it is better than traditional currency was largely based on Bitcoin, and there are many cryptocurrencies that use alternative solutions to protect the encryption or blockchain . There are already thousands of different cryptocurrencies, some of which are widely used, while others are niche currencies without the large user base. There are mostly both pros and cons to all of these, but most of them use a variation of the explanation above to ensure the integrity of the currency.