Cryptocurrencies represent a revolution in the financial world, with the promise of democratization of money, superior security and privacy. But how do cryptocurrency transactions work? Let's start from the basics and move on to the more complex details.
The Basics
Cryptocurrencies are digital currencies that use cryptography to ensure secure transactions and to control the creation of new units. Unlike traditional currencies, cryptocurrencies are not controlled by a central bank or government. Instead, transactions are confirmed by a network of computers called the blockchain.
To carry out a transaction, you need a digital wallet, which is software that allows you to send, receive and store cryptocurrencies. Each wallet has a pair of keys: a public key, which is like an email address, and a private key, which is like a password. To send cryptocurrency, you need the recipient's public key. To receive it, you provide your public key.
Transactions
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When you send cryptocurrencies, the transaction is transmitted to the blockchain network. The transaction includes the sender's public key, the recipient's public key, the amount of cryptocurrency and a digital signature, which is created using the sender's private key.
Computers on the blockchain network, called nodes, validate the transaction. They verify that the sender has enough cryptocurrencies and that the digital signature is valid. If everything is correct, the transaction is included in a transaction block, which is added to the blockchain.
Blockchain
The blockchain is a chain of blocks, where each block contains a number of transactions. Each block also contains a hash, which is a unique code generated from the transactions in the block. Furthermore, each block contains the hash of the previous block, creating a chain of blocks. This makes the blockchain extremely secure as any attempt to change a transaction would require changing all subsequent blocks.
Nodes in the blockchain network compete to add the next block to the blockchain, a process known as mining. They do this by solving a complex mathematical problem, which requires significant computational power. The first node to solve the problem receives a cryptocurrency reward.
Security
Cryptocurrencies are extremely safe. The private key is needed to send cryptocurrencies, and without it, cryptocurrencies are essentially inaccessible. Furthermore, the blockchain is immutable, which means that once a transaction is confirmed, it cannot be changed or removed.
In addition, mining ensures network security. Since mining requires significant computational power, it would be too expensive and difficult for an attacker to control 51% of the network, which is what it would take to alter the blockchain.
Privacy
Cryptocurrencies also offer privacy. While all transactions are public on the blockchain, they are associated with public keys, not real identities. Additionally, some cryptocurrencies such as Monero use advanced techniques to provide additional privacy.
In summary, cryptocurrency transactions are secure, private and decentralized. They represent a new way of conducting financial transactions that is censorship resistant, open to all and not dependent on traditional financial institutions.
