Cryptocurrency can be defined as digital money that can be used as a medium of exchange that uses cryptography to secure it’s transactions.It is basically virtual money used as actual money for buying goods and making trades without any restrictions.The recent and best example of cryptocurrency is BitCoin. Bitcoin was developed by SATOSHI NAKAMOTO in year 2009.
There are some conditions that are met by cryptocurrency systems in comparison to actual currency:
Cryptosystem does not require any kind for authority.
The system keeps an overview of cryptocurrency units and their ownership.
The system allows transactions to be performed in which the ownership of the cryptocurrency units are changed according to transaction.
Basic representation of working of cryptocurrency
Architecture of cryptocurrency defines how the system is designed and how it works. It consists of 5 parts:
1.Blockchain: Block chain is a chain of blocks that are linked and secured using cryptography. Each block consists of a hash pointer as a link to previous block,a timestamp and transaction data.A blockchain is typically managed by a peer to peer network collectively adhering to a protocol for validating of currency.
2.Timestamping: Cryptocurrencies use various timestamping schemes to avoid the need for a trusted third party to timestamp transactions .The first timestamping scheme invented was the proof-of-work scheme.Some other hashing algorithms that are used for proof-of-work include CryptoNight, SHA-3, etc.
Some cryptocurrencies use a combined proof-of-stake and combined scheme. The proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus.Different hashing algorithms are used for this.
3.Mining: In cryptocurrency, mining means validation of transactions.This is done by hashing.Machines such as FPGAs and ASICs are used for running complex hashing algorithms like SHA-256 and Scrypt to generate different hashes.All the transactions could be tracked with the help of Mining.
4.Wallet: A cryptocurrency wallet stores the public and private "keys" or "addresses" which can be used to receive or spend the cryptocurrency. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet.
5.Anonymity: In cryptocurrency the wallet is not tied to people but rather to one or more specific keys.Hence cryptocurrency users are unidentifiable but all the transactions are freely available in blockchain.
As cryptocurrencies are becoming more and more mainstream, law enforcement agencies, tax authorities and legal regulators worldwide are trying to understand the very concept of crypto coins.Also it depends on individual countries whether they allow the usage of cryptocurrencies.For e.g In America ,China etc it is legal in countries such as bangladesh,Nepal etc it is illegal.
Some different types of cryptocurrencies are:
To conclude we can say that cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet. While these alternative, decentralized modes of exchange are in the early stages of development, they have the unique potential to challenge existing systems of currency and payments.