What is Cryptocurrency
What is a cryptocurrency like Pandacoin, Bitcoin, Litecoin and Dogecoin? After-all, doesn’t money have to be backed by a government or a commodity like gold to be worth anything? What are crypocurrencies, and how are they made?
A cryptocurrency is a digital currency stored in digital form on what is called a “blockchain”, distinct from traditional currencies which are represented in physical form with paper/plastic notes or metal coins. The blockchain can be understood as a digital public ledger which tracks coins coming into existence, and coins moving from place to place. This digital currency in the form of information is created through the process of solving algorithms. That is, you start off with an algorithm or formula which contains the information in question, which is then solved.
A computer or other piece of hardware is what does the work to solve the algorithm. For each part of the algorithm that is successfully solved, a certain number of these digital coins are released to the worker that solved the section of the algorithm. An analogy to this would be, a person has a collection of math problems, and for each math problem solved, that person gets paid a dollar. These coins can be traded to merchants who accept them in exchange for goods and services, can be bought or sold for traditional currencies, or traded for other digital currencies.
The way you hold onto such a currency is by using what is called a “wallet”. A cryptocurrency wallet is obviously not like a regular wallet made of leather or cloth, but is instead a piece of software which can hold the coins you find, buy, or trade for. This wallet has an address, sort of like a bank account number, which identifies it for transactions, and a password which you provide, to keep it secure. The way to use such a wallet is to download the wallet provided by the main website of the cryptocurrency you’re interested in, and open it. Inside the program you will be able to find your wallet’s address, and give it a password. Additionally you should“back up” your wallet, so that if your hard drive fails or some other fate befalls your computer, you don’t lose what’s inside your wallet! Exactly how to do that varies, and you can always ask the community that trades and deals in that cryptocurrency exactly how to back-up their particular wallet.
So, now you know vaguely what a cryptocurrency is, and now you have a wallet so you can hold them. How do you get them? Well, there are two methods for algorithm solving. Proof of Work (POW), and Proof of Stake (POS). With a proof of work coin, in order to “create” more coins for yourself, you must solve chunks of the algorithm, as mentioned above. Of course you don’t do this yourself, but your computer will do it for you. You download a program that is meant to “solve”, or more colloquially, “mine” this algorithm for you, tell it where to send the coins it finds, and begin mining.
Programs that solve, or mine, for you are each different, and the best mining program for you depends on the kind of coin you’re mining, the kind of video card or piece of hardware that you are using to mine, and other factors. These are details that you can easily learn by asking individuals in the community of the coin you’re interested in or reading other articles found in the Crypto Crash Course that provide a more in-depth treatment of this material. Check out our step-by step mining tutorial to get started on using your computer to obtain cryptocurrencies.
As for the other type of coin, proof of stake (POS), the only way to make “new” coins, is by having coins already. POS coins provide interest to you in the form of new coins that your wallet mines for you. A proof of stake coin may also allow you to gain coins with the same mining method as mentioned above, albeit only indirectly! The way this works, is there is a service which mines other coins, not the coin you want, and sells those coins to buy the coin you do want. These are called multipools. This is a fast and easy way to gain coins for your wallet, and you can understand more about this topic by asking the community of the coin you wish to get involved in, reading other articles in the Crypto Crash Course that provide more information such as our step by step guide to miningor the articles on multipools.
There are also services called “faucets” which give you a small amount of free coins if you provide it with your wallet address. These are usually funded by donations from other people who have these coins, and want to help other people get involved. This is another easy way for you to gain coins. Of course, cryptocurrencies are more complex than all that have been mentioned here, but this a good start to beginning your foray into the frontier of decentralized digital currencies.