Cryptocurrencies use cryptography for security and a network of computers that verify each transaction. Each user can have public addresses for storing his digital coins in them. Each transaction is recorded in a public ledger , which can be described like an immutable database called “blockchain” which is constantly being expanded with new data packages (blocks) on a predefined frequency (for example every 10 minutes for the bitcoin). This ledger containing the precious information is stored in multiple copies to all the devices which are part of this network (nodes).
With cryptocurrencies, an individual doesn’t have to trust an organization like a bank to keep its funds, because the consensus of the network is confirming the balance of his wallet and each transaction between different wallets.
How the need for a digital coin led to the blockchain revolution?
There are some special advantages of the cryptocurrencies which made them so popular after the launch of the legendary Bitcoin:
1. They allow very fast transactions of even big amounts.
2. They make borderless transfer of ownership easy.
3. The most important : Transactions don’t require anymore third trusted parties (like a bank).
The third and most important feature is the reason why Bitcoin and other cryptocurrencies have accepted a merciless war from the banking system and the governments around the world.
This is because with the blockchain and Proof of work models which have been introduced by Satoshi Nakamoto and his legendary Bitcoin , the banking system and the elites behind it felt that something… dangerous is coming towards them. Something that can degrade their role.
An example for better understanding
For a better understanding about how the cryptocurrency work in order to make our life and transactions easier, we will give an example.
Let’s Say that Mary wish to send $30 to her friend George. Normally, she would have to give the order to her trusted bank to remove $30 from her account and to make this transaction, by sending the amount to George’s account using his banking address (IBAN) after removing a fee from Mary’s account as well. George’s bank will update his account. Many times the next working day or even later if the Bank is abroad.
Same example using a cryptocurrency
The blockchain is keeping information about the balances of each wallet and the history of all transactions.
When Mary is sending the desired sum of cryptocurrency worth $30 to George, the blockchain is updated in just a few minutes or even seconds, depending on the used cryptocurrency.
In this manner the new balances of their addresses are recorded and everyone who is participating in the network of the specific cryptocurrency can keep a copy of the information. A copy of the ever evolving database or ledger which is named blockchain and includes every transaction of the network in timestamped immutable “pages” which are called blocks.
The benefits of the cryptocurrency scenario
1) In the Cryptocurrency scenario, everything is happening almost instantly.
2) The fees are usually much lower (with some digital coins like BitcoinZ next to zero).
3) Additionally, there is transparency for all the transactions as everyone can check the validity of a transaction through the blockchain explorer.
4) Even for people who wish to have privacy in some transactions there are some digital coins which offer this option as well!
It is more than obvious that a cryptocurrency network offers great advantages in comparison with the banking system. These advantages are even more important when we are speaking for transactions between people in different countries.
Most importantly, with a cryptocurrency network you avoid the risk of a financial institution bankruptcy which could lead to a haircut for all the deposits. For example in 2013 Cyprus Banks cut up to 50% the funds of their depositors.
Consequently, the most precious opportunity that cryptocurrencies offered to the world is this : you no longer have to trust a third party to keep your funds, with all the associated risks attached to this.