How Does Cryptocurrency Work?

Most cryptocurrencies function and circulate on the blockchain. This is an open, decentralized database where information about all transactions is recorded and stored. It is not located on any separate computer, server or hard drive, but is divided into nodes. It is supported by active members of the network – ordinary users of full-fledged wallets.

Individual cells with recorded data are blocks. Moreover, all the blocks are interconnected in the chain – from this comes the name Blockchain.

Blockchain Simplified Block Creation Process
Blockchain Simplified Block Creation Process

The connection is established by writing the hash of all previous blocks to the new block. Because of this, it is almost impossible to change a separate block – for this, you will have to “hack” all the blocks in the chain.

Hash is simply a result of all data included in the transaction/block encrypted into a single alphanumeric string. To illustrate, let’s take a phone number +1-617-949-4546 and sum all numbers multiple times:

  • 1+6+1+7+9+4+9+4+5+4+6 = 56
  • 5+6 = 11
  • 1+1 = 2 – this number is called hash sum or simply hash.

The prefix “crypto” is because Bitcoin and other currencies use encryption and cryptographic hash functions. So each member of the network has a private key and a public key. The private key is used to sign a “transfer of ownership.” This is the basis of all transactions and ensures the transfer of cryptocurrency from one participant to another. And the public key is used to verify other people’s transactions in the blockchain. In other words, a private key is a secret signature that lets the blockchain know that the transaction is legitimate and a public key is the account number that you can share with anyone to receive money.