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How do cryptocurrencies work?

3 min. reading
Bitcoin / 3 May, 2021

Edgar Mondragón Tenorio Journalist

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In October 2008, an individual or group of individuals who would later be known as “Satoshi Nakamoto” released the “Bitcoin” white paper”. His claim is that it will become the world’s digital currency, distrusting the FIAT money backed by governments and the International Financial System (IFS).

Since then and to date Bitcoin has gained popularity not only among those who distrust the IFS but also among those who profit from it through investments. It has been gaining a foothold as a decentralized (unregulated) and highly traded financial asset.

Since the emergence of Bitcoin, dozens of cryptocurrencies have been born. Most of them, following the line marked by Bitcoin; Allowing people to have access to a unique and incorruptible ledger. These same people are the ones who will validate the transactions made in this new financial ecosystem after being reviewed by many members of the community.

In the face of the wave of money printing by central banks, cryptocurrencies propose a currency that serves as a means of payment and store of value (cryptocurrencies), that does not generate inflation, exempt from economic-monetary laws, limited in its production, and accepted by all individuals, without the need for any government or financial entity to endorse it.

Cryptocurrencies: benefits and risks of virtual currencies

Cryptocurrencies: benefits and risks of virtual currencies

2017 has been the year of cryptocurrencies: More than 300 new virtual currencies have been created. Bringing their total to over 900. In other words, the number of virtual currencies in the world more than triples the number of conventional, state-issued currencies, which according to the UN currently stand at 180.

What are the characteristics of cryptocurrencies?

Decentralization

The fundamental principle of Bitcoin and other cryptocurrencies is that they are a secure, efficient, and decentralized means of payment, with no banking or government intermediaries involved.

This is achieved using cryptography which, through a code open to participants in the crypto ecosystem (miners), validates transactions made with cryptocurrencies by decrypting a complex algorithmic series of encrypted data that will form part of a block.

Security and transparency

The blocks are part of a chain of more blocks with more encrypted data, making it difficult, if not impossible, to breach these codes.

To access a specific section of the block it is necessary to decrypt all the blocks of the entire chain, thus ensuring the security and transparency of these transactions.

Blockchain

This is what is known as Blockchain. It is a digitized and shared record that cannot be modified once the miners have confirmed and verified each transaction and incorporated it into a block.

In this way, the precept of decentralization, proposed by Nakamoto to prevent a single entity, government, or company, from having total control of the information circulating in the ecosystem, is fulfilled.

Also, in this way, the need for any intermediary to avoid the “double payment” involved in digital transactions is eliminated. This forced the need for these regulatory bodies.

This technology has expanded to diverse areas such as commerce, medicine, security, or elections. They have also given rise to the creation of multiple similar projects that have created thousands of cryptocurrencies.

For the time being, the use of these cryptocurrencies is already a reality that is starting to become more commonplace, not only due to the gradual adoption and use of the main cryptocurrency projects in the world, but also due to the growing use of Blockchain technology, the technology behind these cryptocurrencies.

 

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