What is a Crypto Currency?

There are normal currencies like dollar and euro. They are issued by governments and are basically a promise to be exchanged for other worthy things. Our common believe that this promise will be kept gives bank notes their value. Another important fact of dollars is that there is a limited amount of them. While the governments print new bank notes, they usually do so cautiously.

Crypto currencies are like digital bank notes. Algorithms ensure that there is only a limited amount. Interestingly, people also believe in their promise, so crypto currencies are valuable like other currencies. The allure of crypto currencies is that they are not controlled by any government. They are also much cheaper to transfer around the globe.

How Do Crypto Currencies Work?

Brace yourself, this is a complex topic.

There is a global peer-to-peer (p2p) network which manages the currency transactions. Transactions are packed into blocks. The p2p network chains them up and the longer transactions are in the majority chain, the more confirmed they are.

Then there are miners, who use their computers to solve puzzles, which are provided by the latest block. The miner who solves a puzzle gets a few freshly generated coins for his work. The puzzle solution serves as a signature to the latest block and improves the security of the chain. Basically, miners are the ones who print the money.

Anybody can download a wallet software. By running it you become part the p2p network and you can receive and send money. Money is transferred between addresses, which look like a long string of random letters and digits. For example, if you send Dogecoin to DDcErseNi5kDuxEzTXyq3dtfwuDBfTvW3o you send a tip to the author of this blog. Your wallet also generates address under your control, so people can send coins to you.

Your wallet does not actually store the coins. The wallet contents are managed by the p2p network. This means your computer does need to be online or running to receive money. Your wallet contains the keys, which enable you to send money from your addresses. There is no safety net. If you lose your wallet, your keys are gone and your coins are lost. Backup the wallet regularly to avoid this.

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