It’s well-known that cryptocurrency is a decentralized digital currency that isn’t issued by any bank or government. Bitcoin and Ethereum are probably well known by almost everybody by now. Yet these are only a few of the thousands of cryptocurrencies out there hoping to hit the next big break.
You may be wondering where all of them come from with so many out there. In the absence of a bank and a government, no coins are printed or minted, and none is required. While you can spend cryptocurrency like regular money, it was created in an entirely different manner.
Cryptocurrency is a form of Software
Bitcoin and Ethereum are among the cryptocurrencies that are mined, but not all of them are mined. All cryptocurrencies are software created by code, regardless of how they were created. Every aspect of the cryptocurrency is determined by that code, all the way from how to store data to how to record transactions to mining rewards distribution and the maximum token supply.
Most of the time, the software used in generating cryptocurrencies is decentralized, and the code is public. Individual computers around the globe now host decentralized public software instead of one central server.
Cryptography, Algorithm, and Blockchain are the power backing crypto
When cryptocurrency is intended to be used as money, it is stored on a blockchain, which is a secure database that serves as a record for every coded transaction. Imagine it as some kind of electronic chequebook.
Without meeting specific conditions, it is impossible to modify an entry in the blockchain once it has been entered. Each transition is visible to everyone involved in this case. By using blockchain technology, cryptocurrency achieves three of its most important characteristics:
A transparent process
by decentralizing
Impermeability
As end-users are aware, ‘tokens’ or ‘coins’ are just numbers stored on the blockchain. Similarly, cryptocurrency is generated by algorithms, which rely on cryptography which is why they’re called cryptocurrency.
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Mining of Cryptocurrency
For the most part, the algorithms that power cryptocurrency is written to reward computers for adding transactions to the blockchain. This is called mining. Blockchain transactions are added to blockchains by miners using special hardware and decentralized, public software.
Miner gets paid in new cryptocurrency tokens in exchange for providing blockchain maintenance. This is the primary method of generating cryptocurrency tokens. It is technically possible for anyone to be a miner, but it is generally a fruitless endeavour. In addition to being complicated, competitive, expensive, it consumes a lot of power.
However, certain types of cryptocurrencies were never intended to replace fiat currencies i.e., some cryptocurrency was never designed to be a form of currency. These non-mineable, un-spendable cryptocurrencies are sometimes offered to reward early investors in new ICOs (initial coin offerings) when a new cryptocurrency is launched.
It is also possible to create a new cryptocurrency through a deviation in blockchain, called a hard fork. A hard fork occurs when blockchain protocols change dramatically that new branches of the chain that is incompatible with the old branch are created. For instance, Bitcoin Cash was formed as a result of a hard fork on the original blockchain.
Verification Techniques
Cryptography relies on verification. Cryptocurrencies are not backed by trust, as are fiat currencies. There are two types of verification techniques it uses, which include proof of stake and proof of work.
In most cases, proof of work is used to verify transactions. Miners use special hardware to solve complex math problems created by algorithms. A miner verifies blocks of transactions by solving a puzzle, which is then added to the blockchain ledger. The miner who mines it out first wins the reward.
Proof of Stake was developed to reduce transaction verification power requirements. For someone to check transactions and compete for rewards, they must prove they have skin in the game. To verify transactions, users must stake their cryptocurrency by locking it up in a communal vault. By staking more, you are allowed to verify more transactions and earn more cryptocurrency.
Bottom Line
These are the various methods through which cryptocurrencies are produced, and the miners are rewarded. In case you’re wondering about the process of producing cryptocurrency, here is all the information you need.
