What are cryptocurrencies, and how do they work?

Bitcoin was launched more than a decade ago, bringing with it the digital ledger known as blockchain. The first cryptocurrency created, bitcoin is by far the most popular and valued cryptocurrency to date. But even with all the relentless buzz surrounding bitcoin, ethereum and other digital currencies, cryptocurrencies and the revolutionary blockchain technology on which they are based remain a mystery to most.

Despite the evangelization of cryptocurrency investors, including some celebrities, a 2021 survey by the Pew Research Center found that only 16% of Americans said they had ever invested in cryptocurrencies. This increased to 31% between the ages of 18 and 29 and 43% of men in this age group, compared to 19% of women in the same age group.

For many people outside of these percentages, a healthy skepticism about digital currencies may have deterred them from trying to understand language or technology.

But as cryptocurrencies and related technologies reach politics, are intertwined with the larger economy, have an impact on the environment, and are increasingly the target of scammers, you should have a general idea of ​​what are cryptocurrencies, how they work and what their drawbacks and potential are. . With that in mind, here’s a basic overview of cryptocurrencies and blockchain technology for the uninitiated.

It’s “blockchain” or “blockchain”

That is, depending on the use. A blockchain is a type of database. Different cryptocurrencies are built in different blockchains. Bitcoin is based on the bitcoin blockchain and ether is based on the ethereum blockchain. Some cryptocurrencies or tokens are built on top of other cryptocurrency blockchains. For example, many new tokens are built into the ethereum blockchain, but at the most basic level, all cryptocurrencies are supported by one blockchain.

When it comes to technology, call it a “blockchain.” When referring to the public registration system as a whole, call it the “blockchain.”

Blockchains record cryptocurrency transactions in encrypted digital records that live on servers around the world. Some blockchains allow developers to create applications and program contracts. Blockchains can also be used to record other types of information, such as property records or the origins of a food.

NFT, or non-expendable tabs, which are digital elements, such as an image or video secured and stored in the blockchain to ensure that every element, or asset, is unique and unalterable, is the latest news-generating trend that has come out of blockchain technology.

Is there an easier way to think about it?

Basically, cryptocurrencies are digital money. The blockchain is a database, or digital ledger, for recording the transactions of this digital money. This digital money is not supported by any government or institution.

How are cryptocurrencies made?

Different cryptocurrencies have different digital (code) architectures, so their operation varies. As an example, we use bitcoin, which is “extracted”.

This is how cryptography works: networks of specialized computer processors that run on large amounts of electricity and produce a surprising amount of noise and heat, compete to solve a mathematical puzzle: calculations needed to verify the latest bitcoin transactions, record- blockchain and Make sure the blockchain is secure. The computer that solves the puzzle first earns newly minted bitcoins. This design is part of the open source created by the corporation, known as Satoshi Nakamoto, which launched bitcoin in 2009.

The design of the mining system encourages participants to spend resources (in this case money and electricity) to help keep track of who owns which bitcoins. Read more about this here.

Now what is all this about decentralization?

An additional feature of blockchain design is that a public record of transactions is maintained on many computers that make up a global network. These computers, or nodes, constantly check the information with each other to confirm the accuracy of their records. Replication of these records over the network is part of what prevents an incorrect or fake transaction from being recorded.

Overall, the decentralized, open source nature of the blockchain means that no person or institution can control it, although governments and large corporations may restrict access to digital testimonials under certain circumstances. China, for example, the illegal cryptocurrency trade in September 2021 due to concerns that cryptocurrencies could weaken government control over the financial system and facilitate crime. More recently, a major cryptocurrency exchange, Binance, stopped processing purchases made with certain credit cards issued in Russia his invasion of Ukraine.

How secure is blockchain?

Cryptocurrency lovers find the blockchain quite difficult to hack, which is part of its appeal. But the security of a blockchain depends on which platform you are talking about.

The bitcoin blockchain has not been compromised so far, but the second largest blockchain and cryptocurrency chain, ethereum, faced a major crisis in 2016 due to a software vulnerability. Although the ethereum blockchain was not hacked, some $ 50 million was stolen on ether.

Many cryptocurrency-related services and technologies have been hacked or simply exploited by their designers to trick and steal participants.

Cryptocurrency exchanges – where people can trade cryptocurrencies for traditional currencies – have been compromised several times, with digital bank robbers clearing their accounts. Memorably, in 2018, the CEO of a cryptocurrency exchange died without transmitting a crucial password, effectively blocking customers with millions of dollars in cryptocurrencies.

Whether they are victims of a scam or a security breach or have simply forgotten their digital wallet password, consumers have few recovery options. There is no password reset or security in the pre-programmed decentralized system.

In short, investments are backed by few protections. U.S. prosecutors prosecute criminal behavior, such as false advertising or theft, but if the value of a new cryptocurrency witness plummets and does not recover, that money is lost. Even the value of bitcoin, which some proponents call “digital gold,” is extremely volatile.

One last thought: cryptocurrencies remain the preferred payment of criminals. Illegal drugs or other prohibited commodities are often exchanged for cryptocurrency, which can be transferred over distances more easily than cash, and which prosecutors may find more difficult to locate. But for most cryptocurrencies, the record of who owns what is publicly visible forces criminals to be wiser in order to effectively launder cryptocurrencies obtained through theft, scams, or ransomware attacks.

Where does the “value” of cryptocurrencies come from?

That old question: Who decides what a dollar is worth? – It is even more complicated with cryptocurrencies. Unlike traditional currencies, no government, central bank, or physical asset supports cryptocurrencies.

Instead, their values ​​are based on people’s faith in them, as determined by the market. Sponsors expect more and more people to want a digital currency that is relatively free of government oversight, and that as people sink resources into cryptocurrencies, their value will increase over time.

Also, unlike traditional currencies, some cryptocurrencies function as an investment and as a unit of potential exchange. Some consumers buy bitcoin in hopes of selling it for profit. Others may use a fraction of a bitcoin to get a firecracker pork burrito at New Hampshire’s Taco Beyondo, one of a growing list of companies that accept bitcoins as payment.

What about environmental impacts?

As mentioned, crypto mining consumes a lot of energy. A peer-reviewed study estimated that as of November 2018, bitcoin’s annual electricity consumption was 45.8 terawatts-hour, comparable to Hong Kong’s net electricity consumption in 2019, according to the Administration. US energy information. This does not even take into account the energy consumed by other cryptocurrencies.

Too, bitcoin power consumption has increased annually: the Bitcoin Mining Council estimated that the cryptocurrency consumed 220 terawatts-hour of energy in 2021.

When judging the environmental impacts of cryptocurrencies, it is important to consider the source of electricity. Cryptocurrencies often want electricity at the lowest cost, which often leads them to highly polluting energy sources such as coal. At other times, logistical constraints lead them to seek the cheapest available energy from renewable sources such as hydroelectric dams. These variables must be taken into account when calculating the exact energy consumption and environmental impact of cryptocurrencies.

The environmental impact also includes the energy used to cool computer processors, which heat up while they are running, as well as the electronic waste produced when miners upgrade their equipment and discard old models or broken units.