Similar to money, cryptocurrency is a medium of exchange. However, cryptocurrency is virtual or digital, meaning that there is no physical coins or bills, and it relies on cryptography to secure and verify transactions as well as prevent counterfeiting. Cryptocurrencies operate within a peer-to-peer network, meaning transactions occur directly between users without the need for any intermediaries such as banks. This is a common characteristic of cryptocurrencies which is often referred to as decentralized system, where the network is maintained by a distributed network of computers (network nodes) spread around the world. Some networks are more decentralized than others depending on their network structure and network node distribution.
Unlike centralized systems, the issuance and management of cryptocurrency is determined by various parameters set at the launch of the network, which is based on programmed algorithms and cryptographic proofs.There is a predefined set of rules that define how the cryptocurrency system should operate.
Bitcoin is generally considered the first modern cryptocurrency because it was the first digital currency designed to operate in a fully decentralized manner without the need for a central authority. While there were other attempts at creating cryptocurrencies, or digital money, they failed due to lack of public trust or inadequate technology of the 1990’s. The creation of Bitcoin also marked the first implementation of Blockchain technology.
At the core, blockchain is a type of public, digital and distributed ledger. A blockchain is a linear chain of blocks, where each block is made up of various components, one of which is a list of transactions since last block and a reference to the block before it. So when a cryptocurrency transaction is made, the currency is transferred between parties as a block of information that gets added to the historical chain of transaction data in the public ledger. Each validated block also contains a registered solution, also known as Block Hash, of a complex mathematical problem, which is part of the process of Mining.
All network participants have access to the distributed public ledger and its immutable record of transactions. No network participant can change or tamper with a transaction after it’s been recorded to the shared public ledger.
Blockchain can also be applied to other activities and processes that do not involve financial operations, with a wide variety of applications being developed since its inception.