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How do cryptocurrency transactions work?

How crypto transactions work

What is cryptocurrency?

Cryptocurrency refers to the digital currency that is exchanged online, directly in a peer-to-peer fashion. Unlike ‘regular’ forms of physical currency that we have known thus far, cryptocurrency is free from any kind of government control. This type of currency leverages blockchain technology to create a decentralised network of nodes that monitor and validate all crypto transactions. It is among the most sophisticated manifestations of modern technologies such as the internet, high performing computers, cryptography and blockchain. Some popular examples include Bitcoin, Ethereum, Bitcoin Cash, Litecoin, Monero, Ethereum Classic, Bitcoin Gold and Dogecoin.

 

Advantages of cryptocurrency over mainstream currency

It is the blockchain-powered design of cryptocurrency that makes it superior to fiat currency in more ways than one, including functionality, efficiency and security. The decentralised nature of cryptocurrency makes it truly peer-to-peer for it negates the role of a central bank or similar government oversight. This also increases the speed, while reducing the cost of transactions. A public ledger ensures transparency of the system. In addition, since the blockchain network ties every new block to the one before it, it creates an immutable network of currencies that offer the highest form of security. The global nature of cryptocurrencies shield it against economic instability and exchange-rate fluctuation. 

 

Use of blockchain technology in mining and exchange of cryptocurrency

Blockchain is a form of distributed ledger technology (DLT) that is maintained by a network of nodes, each of which stores its own copy of the blockchain. There can, hence, be thousands of copies of the same blockchain spread across a decentralised public network which makes it very difficult to manipulate or hack the blockchain technology. The aim is to create an open record of data and retain autonomy over it; no single person or committee is put in charge of the record, the trust is rather vested in the technology that runs the network. The various computers that are connected to a blockchain use power and energy to verify transactions on the network. Upon successful verification, various transactions are grouped and chained together as blocks in the blockchain. This process of creation of new blocks is known as mining and the people doing it are called miners. Miners are rewarded for their effort and resources spent on mining, in the form of crypto paybacks. Hence, this is how the two technologies are intertwined – cryptocurrency is an incentive for people to maintain the blockchain. 

Mining can be a complicated process to understand. Each block is hashed with a nonce (ie. an integer), the result of which is another hash (with a set number of zeroes in the beginning). As miners race to find the desired hash, the computers run through random nonces to discover the magical hash. This task, however, is no longer achievable by a regular Joe or Jane with a computer and an internet connection. 

Mining has become super competitive and requires speciality hardware known as application-specific integrated circuits (ASICs). It is now largely done commercially, primarily in countries that offer cheap electricity. On a mathematical note, the highly sophisticated SHA256 cryptographic algorithm is used to produce these hashes. The confirmation hash of every new block is linked with that of the previous block, hence making an irreversible chain. The entire process of validation and verification of the blocks thrives on the concept of proof of work. This is a consensus mechanism that is deployed given its asymmetry – it is hard to replicate but easy to verify. So miners are able to run the transaction data through a verification hash that verifies it but does not reveal the information itself. 

 

Cryptocurrency is stored in a digital wallet and exchanged using public and private keys. Think of the public key as your bank account number which can be used to send money into your account. For withdrawing money, however, the private key acts like the online banking password that protects your crypto wallet. Cryptocurrency can, therefore, be exchanged directly between individuals. In addition, cryptos such as Bitcoin can be traded on the btc market using online trading platforms such as CoinDCX

Differences between cryptocurrency and fiat currency

Cryptocurrency vs Fiat Currencies

 

CoinDCX: the top cryptocurrency exchange

CoinDCX is the largest crypto exchange in India, with over 57,000 monthly active traders and $10 million daily trading volume. It is an all-inclusive ecosystem with a built-in CoinDCX Wallet that the users can securely store their cryptos in, or even use to transact with other parties. CoinDCX offers the most powerful wallet, so you can trade on spot, margins, futures, and lend using a single wallet.  In addition to impenetrable security measures such as cold wallet storage, withdrawal confirmations and 2-factor authentication, complete fund safety is insured by BitGO. CoinDCX is, therefore, among the most trusted and safest crypto exchange with a loyal user base spread across the world. 

 

Here is a complete list of integrated CoinDCX products on offer:

  • Margin – Trade across 250+ markets with 6X leverage
  • Insta – Fastest FIAT On Ramp Off Ramp with zero trading fee. Buy 40+ cryptocurrencies with INR in less than a minute 
  • Trade – Trade limitlessly with massive liquidity on crypto and INR pairs/orderbooks
  • Lend – Earn upto 20% annual interest through lending
  • Stake – Stake and Earn passive income
  • Futures – Maximize trading potential with leverage up to 20x.
  • Convert– Easy real-time crypto price converter for cryptos as well as fiat currency.

Head over to CoinDCX and sign up today!

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