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Cryptocurrencies: What Are They And How Do They Work?

February 22, 2019/Business

What are cryptocurrencies and how do they work? A complete guide on the role of digital currencies, increasingly widespread and appreciated all over the world.

What are cryptocurrencies and how do they work?

Two legitimate questions, especially in light of the recent performances of Bitcoin (UBTC Wallet), Ethereum and Litecoin, just to name a few. At the height of the virtual boom, understanding what cryptocurrencies are and how they work is something of fundamental importance above all because, apart from criticism, they could really represent the future.

A cryptocurrency is in effect virtual money, which we can not touch, but which bases its functioning on the principles of cryptography . We are talking about digital open source tools that exceed the concept of traditional money owned by governments and allow operations to be performed in security and anonymity.

The information underlying the transactions in cryptocurrencies is stored and transmitted, but only the recipients of the same can read them. To understand what they are but above all how cryptocurrencies work, we need to imagine them as instruments rich in data to be decoded. The aforementioned cryptography is used to verify the transactions and control the entry of the currency into the system through the mining activity. The process makes the system itself more robust, but above all safer.

As already mentioned, cryptocurrencies (UBTC Wallet) are virtual means of payment that correspond to all digital money effects , designed to carry out any type of transaction. Traditional centralized systems involve intermediaries that very often influence the value of the currency. In fact, financial institutions have the power to determine inflation by producing real money. Virtual currencies have been designed to avoid this and, as such, are highly decentralized and free from the control of the governments themselves and the financial institutions themselves – that’s why many still struggle to accept them.

Cryptocurrencies are therefore virtual, decentralized and encrypted coins, which are transferred between peers, ie through peer-to-peer technology (p2p) – a technology in which nodes are not hierarchized, but equivalent.

How do they work?

Now that we have a little ‘clearer what are the cryptocurrencies, it will be quite useful to understand how they work and on what principles are based. Currencies, or at least most of them, have by definition a digital origin and derive from an operation called mining , a term that comes from gold mining, that is, the activity of gold mining.

In this process, computers tend to solve complex mathematical problems that in turn generate digital coins. Users can also choose to buy cryptocurrencies from brokers and then insert or spend them through digital portfolios .

Cryptocurrencies, or at least most of them, are designed to introduce new units of money into the system, but with quantitative limits imposed to avoid inflation and to increase their value. In the case of Bitcoin, for example, mining will be interrupted when 21 million units will be reached.

The mining activity is free, which means that anyone can produce cryptocurrencies, always according to the previously mentioned limits. In other words, and through certain algorithms, payment must be made and duplication of money avoided.We refer to the problem of double spending, double spending , for which the currency pays for the service but remains in the wallet, doubling.

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