Cryptocurrency 101

by Nils Smith, Chief Strategist Social Media+Innovation

As the world continues to become more connected and dependent upon digital technology, it’s important to stay up to date on the latest developments. Currency is no exception. And cryptocurrency, essentially digital money, is the newcomer on the scene.

What Is It?

Let’s start with the basics. Currency is simply anything with an agreed upon value that we use for exchange. Throughout history, currencies have always changed and digital exchanges are nothing new in terms of currency transactions.

Rather than relying on third-party institutions to verify transactions and ensure security, cryptocurrencies utilize blockchain technology, which makes these transactions more efficient and secure.

Transaction details and the cryptocurrency itself are stored across a peer-to-peer network on the blockchain. This shared network creates both transparency and security for all transactions because it does away with any kind of central authority that tracks transactions. Instead, every transaction is visible to every member of the network.

Mining

In cryptocurrency networks, transactions are validated through a process called “mining.” Think of it like panning for gold. Members of the network – who are referred to as “miners” – sift through mud, or in this case complex data, in order to verify a transaction. The first miner to solve the puzzle gets to authorize the transaction and add it to the public ledger stored on the blockchain.

As a reward for their efforts, successful miners earn their gold in the form of cryptocurrency. While it rarely generates more than a small amount, the reward incentivizes miners to continue their work and maintains the transparency of future exchanges.

This verification process – also known as “hashing” – changes everything about the way we transfer value, which is the core purpose of cryptocurrency itself.

Cryptocurrency Wallets

Now, you might be asking, “How do I spend cryptocurrency?” The simple answer is with a cryptocurrency wallet, which functions like a credit card. Instead of storing your actual cryptocurrencies, it holds the digital credentials you need to access and spend your money.

Cryptocurrency wallets secure your private credentials and allow you to publicly interact with other members of the blockchain for transactions. When making an exchange, a member signs away his or her ownership of a “coin” and transfers it to your wallet. So, while there aren’t any actual coins exchanged, the transaction is saved on the blockchain for all to see and the funds are credited to your wallet.

Hopefully, this gives you a basic understanding of cryptocurrency and how it works. While there are thousands of cryptocurrencies in existence, Bitcoin being the most well-known, many others are working to expand on the underlying technology to deliver value beyond the currency itself. And that’s a trend that seems poised to continue.

For more information on the topic of cryptocurrency, check out my book Crypto For Good: Demystifying Cryptocurrencies for Nonprofits.


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