How Cryptocurrencies Work : Understanding the Blockchain Technology

Home / How Cryptocurrencies Work : Understanding the Blockchain Technology

Cryptocurrencies as medium of payments, investments or borrowings can only transpire by way of blockchain technology. It is important therefore to have a thorough understanding how one becomes a cryptocurrency owner in order to take part in transactions using digital currency as medium.

First off, bitcoin is only one of numerous cryptocurrencies used to transact business outside of the conventional financial institutions. Digital currencies other than bitcoin are collectively called altcoins, which is short for alternative coins. Some examples of popular altcoins are Litecoins, Ethereum, Ripple, ZCash, and Cardano; there are several more available as an alternative to bitcoin.

Secondly, cryptocurrency transactions require the use of a blockchain platform or application in order to connect to other cryptocurrency users, to third party digital currency brokers, to traders or digital currency-wallet providers.

Thirdly, there are two ways by which an individual can acquire a particular cryptocurrency. One is by buying a preferred type of digital money from a broker or from an e-wallet provider using actual cash. The other method is by earning a unit of cryptocurrency for solving every set of related cryptocurrency transactions recorded in a blockchain open ledger. Solving and linking encryptions used in the blockchain ledger is a method of confirming the validity of a transaction that made use of bitcoin or a type of altcoin as payment or exchange mode.

How Does the Blockchain Technology Record and Validate Bitcoin Transactions?

The reason why this cryptocurrency technology is called a block chain is because several digital currency transactions occurring via a blockchain platform will be linked. The purpose of which is to tell a story of how one bitcoin or altcoin user came to own his or her cryptocurrency, and of how he made use of that particular virtual money.

A block refers to the time-stamped cryptogram code used in recording each related transaction in the blockchain ledger. Every block contains the cryptogram code containing the public key generated by the blockchain platform and the private key supplied by the cryptocurrency sender or payer.

Difference Between a Blockchain Public Key and Private Key

A public key is an encryption that identifies the kind of transaction that the blockchain will record. Let us say BitUser A buys $50 worth of bitcoin from BitTrader B. The public key generated by the blockchain platform will refer to this transaction. In order to complete a block, BitTrader B as sender must provide the private key to validate his authorization for issuing the bitcoin.

A private key therefore validates a cryptocurrency user’s ownership of the digital money being transferred to another. An owner receives a private key every time he receives digital currency as part of a chain of transactions. If the private key is invalid or missing, the transaction will not go through since it remains unconfirmed or unvalidated.

In our example, bitcoin recipient BitUser A received a private key, which serves as his authority to use or transfer the digital money to another recipient. In the same way, the new recipient will also receive a private key that will allow him to transact his own virtual currency deal. Miners will then solve and link all blocks of cryptogram codes connected to the bitcoin purchased by BitUser A. Doing so provides full authentication that all virtual currency used in the series of transactions came from legitimate owners.

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