What is crypto? – In very simple language
What is crypto? – In very simple language
When new technologies enter any society, they acquire different words and expressions. With the emergence and expansion of Bitcoin, terms such as crypto, cryptocurrency, digital currency, cryptocurrency and blockchain are widely used among Iranian investors and traders. In this article from , we first answer the question of what is crypto by examining its differences with similar expressions. Then, we will examine the processes of creating crypto, mining it, crypto wallets, crypto exchanges, and how to buy and sell crypto.
What is crypto?
“Crypto” (Crypto) is basically an abbreviated term “Cryptocurrency” (Cryptocurrency). Cryptocurrency is composed of two words “crypto,” meaning “code,” and “currency,” meaning “currency”. With these details, it can be said that crypto is the currency that cryptographic techniques have been used to make them. In some regions, this term is more commonly known as “cryptocurrency,” but it is also considered equivalent to “digital currency” or “virtual currency”.
In the previous articles, we got acquainted with the fundamental analysis of crypto. Digital currency and virtual currency in crypto fundamental analysis both have the same meaning and refer to currencies that are created in the digital space and in virtual form. With this definition, crypto and cryptocurrency are also part of digital and virtual currencies, with the difference that its construction is different from other digital currencies. Therefore, digital currency is a large collection of virtual currencies, a subset of which is related to crypto.
Crypto is very different from other digital currencies. The cryptography techniques used in the “Double Spend” crypto have almost destroyed the currencies. Many cryptocurrencies use a decentralized and distributed system to confirm and record transactions, and new currencies are also mined in the process of recording transactions. In the next sections of this article, we will teach you the special features of crypto in a complete and comprehensive manner.
What is encryption or cryptography?
As mentioned in the What is Crypto section, crypto means code. “Cryptography” is one of the technologies that has played a fundamental role in the creation of cryptocurrencies. Encryption is generally done with three methods: “Symmetric Key Encryption”, “Asymmetric Key Encryption” and “Hash Functions”. The purpose of encryption is the safe transfer and recording of information.
In the symmetric key encryption method, only one key is used for “Encryption” and “Decryption”. In this case, if you try to communicate with a server or person you don’t trust, you will run into trouble. This method is mostly used to keep information safe. For example, if you want to store your information in a secure system, you can use this type of encryption because in this case, you don’t need to share your key with others.
The asymmetric encryption method uses a “Public Key” for encryption and a “Private Key” for decryption. In this case, it is possible to communicate with servers and people without trusting them. For example, if someone wants to transfer money to your account, you can easily send them your account number, because no one with the account number can access your bank account.
Finally, after sending the desired amount from the other party, you can access your account by entering your card password, which is the private key of your account, and be aware of the transferred amount.
Another type of cryptography that is also used in cryptocurrencies is hash functions. These functions produce a unique output for each unique input. The output length is fixed for each input and it is not possible to reach the input from the output. Hash functions are used to connect blocks of information to each other in the blockchain and also provide the possibility of competition to register and confirm transactions. In the next part of the article, what is crypto, which is related to the structure of cryptocurrencies, we will examine the process of generating cryptocurrencies.
What is blockchain?
Before looking at how cryptographic techniques are used in cryptocurrencies, you should familiarize yourself with the concept of blockchain. Blockchain is a new type of database introduced in cryptocurrency and has major differences from conventional databases. Registration of information and transactions in the blockchain is done after the work is done by the nodes connected to it. Transactions in this blockchain are stored in blocks and these blocks are connected to each other. Blocks are connected in such a way that it is not possible to manipulate the old information recorded, and any change in the old information must be accompanied by the change in the information of the next blocks.
Users who are connected to the blockchain are divided into two main categories: nodes and normal users. Nodes are those who perform activities in the blockchain, confirming and recording transactions. Common users are those who use the crypto blockchain to store or transfer their digital assets. Normal users use crypto wallets to connect to the network. While the nodes, which are also called miners, are connected to the system with powerful computing devices.
What is a crypto wallet?
Every normal user must have a digital wallet to connect to the network. The digital wallet is actually the key to access each person’s assets on the blockchain. Asymmetric key cryptography is used to keep assets secure in the blockchain. So, a crypto wallet is nothing but a public key and a private key. The private key is the key used to decrypt incoming messages and sign outgoing messages. But the public key is provided to others to use it to send their message to us.
In response to the question of what is the message in crypto, it should be said that the meaning of the message in this system is the transfer of assets. So, you share your wallet’s public key with others to send you the desired amounts. They send you information about the amount of the transferred coin and evidence of ownership of the asset by the sender in their message and signed with their private key. You receive the message with your private key and view the information sent, and if you approve it, they enter the cycle of approval and registration in the blockchain.
With this system, no one can access your assets unless you share your private key. Note that assets in the blockchain space include transaction contracts that are attributed to different private keys and none of them have a physical and external equivalent.
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What is the consensus algorithm in crypto?
There are two types of users in crypto and blockchain. The first type of users are ordinary users who use the blockchain network to store and transfer their digital assets. The second type of blockchain users are “nodes”, “nodes” or “miners” who are responsible for confirming and recording transactions. Of course, the consensus algorithm is not the same in all cryptocurrencies. Here we examine the consensus algorithm “Proof of Work | PoS”, which is related to the first cryptocurrency, Bitcoin.
In centralized banking systems, transactions are confirmed and recorded by the bank. All account information is located in the bank’s central server. Therefore, when requesting to transfer money from one user to another, the bank can check the user’s information by referring to its centralized database and if the information is correct, confirm and register it and update the user’s account. Centralized database leads to security problems, power concentration and high transaction costs and low speed.
Crypto has developed a decentralized system to solve these problems.
Crypto blockchain is a decentralized system. This means that no one is in charge of managing its information. Therefore, users called “miners” are needed to maintain, verify and record transactions. The first task of miners is to maintain transaction data. The information of all transactions is kept by all miners so that if the information of one of the miners is manipulated or wrong information is added to it, the rest of the users are aware of it and do not allow it to be done.
The second task of miners is to confirm transactions. Transactions created by normal users must be verified by miners to be registered in the blockchain. In order for the miners to confirm the correct data, the competition between the miners is prepared at this stage. The competition is that miners, by putting the information of transactions, the hash of the previous function and the unknown numerical value of “nance” in the hash function of the blockchain, they want to reach the output of the hash whose number of zeros is determined by the network.
What is crypto mining?
In the section on what is the consensus algorithm in crypto, the crypto mining process was explained to some extent. Nodes need powerful computing devices with high power consumption to participate in the competition of registering and confirming transactions. In order for users to have the necessary motivation to participate in this process, the blockchain network rewards the user who wins the competition. The reward given to miners consists of two parts. The first part is the transaction fees that are charged to normal users of the network.
The second part of the mining reward is new currencies mined. In fact, during the block registration process, new digital currency coins are also produced and given to the user who wins the competition. The amount of currencies generated during the mining process may change over time. For example, for the Bitcoin network, the newly mined currencies are halved every four years, which is called “halving”. By controlling the supply of coins, halving increases its price.
Note that the mining process is related to the proof-of-work consensus algorithm. There are other consensus algorithms for securely recording and confirming transactions that are not related to mining. Cryptocurrencies such as Bitcoin (BTC), Litecoin (LTC), and Ethereum (ETH) use the Proof-of-Work consensus algorithm, but Solana (SOL), Cardano (ADA), and Ethereum 2 (ETH) use other consensus algorithms.
What is crypto stick?
As mentioned in the crypto mining section, in addition to the proof-of-work consensus algorithm, there are other algorithms to reach consensus in blockchains, the most famous of which is the “Proof of Stake” (PoS) consensus algorithm. Similar to the proof-of-work algorithm, in this algorithm, nodes must pay a fee to reach consensus. Unlike proof-of-work consensus algorithms that use computing devices and power consumption for proof-of-work, in proof-of-stake consensus algorithms, people lock their digital currency assets in the network and thereby prove their integrity.
Conclusion
In response to the question of what is crypto, it should be said that crypto or cryptocurrencies are a group of digital currencies whose security is provided by encryption techniques and the confirmation and registration of transactions in them is done by nodes distributed around the world. Bitcoin is the first known crypto in the market, which was introduced to the world in 2009. After that, many cryptocurrencies with different applications were introduced to the world.
Today, many people use these systems, and buying and selling cryptocurrencies has also become established between traders and investors.
