Bitcoin and most other cryptocurrencies are open, transparent, peer-to-peer financial networks. If you remember Napster, and other P2P file sharing networks, you can think of cryptocurrency like that – except this time cryptocurrencies are financial, and the market assigns a value to them.
Cryptocurrency can become a complex subject pretty fast, but that is only because the ideas are new. You can achieve a general understanding of how crypto works, by reading a few short paragraphs.
What is a blockchain
The first thing to understand is the concept of a blockchain. A blockchain is a database that keeps a real-time record of the total supply of coins, a complete history of all transactions ever made, and the account balances for each account. The system is open and transparent and is constantly checking and validating the accuracy of transactions – keeping out bad actors.
Does this mean everyone can see what I spend money on?
Yes and no, learn more at Is crypto anonymous?
To get a better understanding read our article What is a blockchain?
What is a wallet
The next concept to understand is wallets. Just like your wallet holds your cash and debit/credit cards, your cryptocurrency wallet holds your coins. Your wallet connects to the blockchain, the giant database that keeps track of everything, and gives you the ability to send coins to other wallets. Think of a crypto wallet as the interface that allows you to interact with the blockchain.
What are addresses
Your cryptocurrency address represents where funds are stored on the blockchain. When you send crypto to someone, you send it to their address. When you receive crypto from someone, they send it to your address. It works just like email, or text messaging. Your wallet will generate the addresses to allow you to interact with the blockchain.
What makes all of this secure
The mechanism that makes cryptocurrency secure is cryptography – really complex math that can validate or invalidate transactions. Luckily, you do not need to know cryptography in order to use and benefit from cryptocurrencies. However, it is good to understand and know what is happening.
When you use your wallet to send funds to someone, complex cryptography checks the blockchain to make sure that you have the funds available to send, and makes sure the address you are sending to is a real address.
The verification of the transaction is done through a process called mining. Mining involves solving complex math puzzles, where the end result is a verified transaction stored on the blockchain. If someone were to send an invalid transaction, the transaction would not fit into the math puzzle and would be prevented from being stored in the blockchain.