Most of us are now quite familiar with the term “Cryptocurrency” but very few actually understand what this is and how it is used for transactions. Therefore, let us introduce you once again to what cryptocurrency is and how it works.
This is a type of digital currency, that uses cryptography to secure transactions. Some of the most popular cryptocurrencies today are Bitcoin and Ethereum. The currencies are transferred directly from peer to peer without any intervention of banks, financial institutions or government. The transactions are validated by “miners” who record transactions in the blockchain and prevent double spending of cryptocurrency.
Cryptocurrency is typically stored in digital wallets that exist on the blockchain. These wallets can be accessed from anywhere in the world as long as you have an internet connection.
Bitcoin — User goes to an online exchange to convert fiat currency for bitcoins and stores them in a bitcoin wallet.
E-money — User exchanges e-money for an equal amount of e-value stored, for example in a mobile wallet.
2. Submitting Payments:
Bitcoin — A request is sent to Bitcoin network in order to make a purchase. Currently, there are many online merchants accepting bitcoin such as overstock.com.
E-money — The value of money to be transferred and the recipient’s phone number are entered. The money transfer is sent.
3. Verifying Transactions:
Bitcoin — Bitcoin’s decentralized peer-to-peer network of “miners” maintains a master ledger- a blockchain, to verify every transaction. It takes an average of 10 minutes to verify. Upon verification, data is broadcast to all users and the ledger is updated.
E-money — User receives an SMS to verify the mobile transaction. The e-money issuer maintains records of all transactions and customer balances.
If you are interested in buying and selling cryptocurrency, stay tuned. We will be writing an introduction to Cryptocurrency Exchange soon.
Cryptocurrency: How does it work? was originally published in CryptoDigest on Medium, where people are continuing the conversation by highlighting and responding to this story.