How Does Bitcoin and Other Cryptocurrencies Work

The engineering behind decentralized currency


Everything in our technological world is evolving. Almost all professional fields in our society are adapting to new technologies. From autonomous cars, to artificial intelligence assistants. Now, money is evolving as well. A few years ago, the world’s first cryptocurrency was invented–the Bitcoin. Now, there are thousands of variants of cryptocurrencies like Ethereum and Litecoin that are used by people around world.

You’ve probably seen a lot of news about these cryptocurrency in newspapers, or even your newsfeed, but you don’t really understand what it’s all about. What is a cryptocurrency and how does it work? A Youtuber, 3Blue1Brown was able to explain the whole process from start to end to help you understand cryptocurrency in detail:

Source: YouTube, 3Blue1Brown

Basically, in a conventional currency like US dollars, all transactions are done via exchanging of physical currency or by electronic bank transfers. These electronic transfers are managed by large banks that we trust to secure our money.

To be able to create a cryptocurrency like Bitcoin, we will be taking the responsibility of keeping track of transactions, managing it ourselves instead of banks. The first step is to create a ledger of people’s payments to everyone else. The ledger will show who owes money to whom, and records all payments that are made between users.

Source: Howtogeek

The next step is to prevent all forms of cheating by adding transactions wherein one of the parties do not agree upon. The solution would be to require both parties in the transaction to sign on the payment. The participants can add their digital signature using both public and private key encryption so that everyone knows the transaction is legitimate.

Finally, who owns the ledger? In conventional currency settings, a bank would maintain it. But instead of a bank owning it, everyone has their own ledger, and all transactions are made public, so that all ledgers are updated at the same time.

With this system, everyone is ensured safe exchange of money without worrying whether the people who are handling it are trustworthy. Instead of trusting a bank for transaction, cryptography can be used to force everyone to do fair transactions. Cryptocurrencies are still in their early stages, but soon they might be the preferred way to make payment transactions around the globe.

 

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3Blue1Brown

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How Does Bitcoin and Other Cryptocurrencies Work

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