What is Cryptocurrency?

The concept of digital money is by no means new. One need only visit their favorite online role playing game to see how popular the idea has been for the past few decades. The difference between those games and real digital money is a technology called blockchain, which not only makes it possible to create uncopyable data, but also makes it possible to distribute a ledger describing the transactions involving that data to an entire network of computers at once. These twin breakthroughs have ushered in cryptocurrency, where a store of value can become completely virtual, and can further be regulated such that its value cannot be altered or manipulated absent mind-boggling computing power and the ability to compromise an entire network at once.

Distributed Data

One of the key mechanisms in redundant data systems is something called “polling.” This kind of technology is common in physical sensor-based systems like industrial strength fire alarms and aircraft safety systems. At regular intervals, the entire system is “polled” to see if all the readings match. If too many of the nodes in the system indicate an alarm, the system goes into emergency mode.

In a distributed ledger like the one used in blockchain and in the world of finance, all of the systems on the network have a copy of the critical data. If one or more of the systems indicate a discrepancy, the other systems can be polled to retrieve a copy of the true and unaltered information in order to recitfy the mismatch. This makes a blockchain-enabled ledger almost impossible to tamper with, which is one reason why cryptocurrency systems are so resilient, according to Nerdwallet.com. The blockchain creates a nearly perfect record of every transaction so there is never any question which participant owns which coins.

Cryptography

In addition to being distributed, the digital currency economy is encrypted. This means without the necessary keys, no one node in the network can alter any of the data, including the inventory of digital “coins” owned by each participant. Additionally, in order to add new coins to the system, it is necessary for a computer or a group of computers to perform a very complex series of math problems through a process called “mining.” When a mining operation is successful, it is rewarded with a unit of cryptocurrency, which it can then exchange with other participants in the network.

Unique Data

Ultimately, a cryptocurrency unit is nothing more than a very long series of numbers that can’t be duplicated easily. This renders each data set unique within its blockchain, meaning it can be exchanged from node to node without losing its uniqueness, exactly like a dollar bill or a quarter in the traditional world of finance. Digital coins like Bitcoin can be divided into smaller units to better facilitate exchanges with real-world currencies like the U.S. dollar.

While Bitcoin and currencies like it are quite popular and likely to become rather valuable over time, the true innovation underlying the digital currency market is the blockchain, which has applications far beyond facilitating the exchange of digital currencies. It is likely, in fact, that future advancements in the field of blockchain technology may end up further improving applications for digital currency and create even more exciting advances.