In the past several months, the popularity of cryptocurrency (eg Bitcoin) has surged exponentially. What was once something no one had heard of has now become so popular, corporations are offering their employees to receive their paycheque via cryptocurrency. It has entered the stock market, and many companies will allow customers to pay with it.
But what is cryptocurrency and how does it work?
Since it keeps gaining status and the world has moved so far into a digital age, it would be beneficial to understand at least the basics of cryptocurrency. So here are some facts on this new form of payment, how it works and how you can use it for your payments in the future.
What is cryptocurrency?
Basically, cryptocurrency is a form of digital money. Cryptocurrency is entries into a database which remain unchanged until you fulfil specific conditions. This is just like with regular money you have in your bank account. You can take it out into real cash but only after requirements are met, that you own the money.
The first form, and still to this day most notable form of cryptocurrency is Bitcoin. It was established by Satoshi Nakamoto in late 2008 to early 2009. He planned to create a ‘peer-to-peer electronic cash system’ in which he accomplished. What this means is that there is no one central server controlling everything. It is similar to peer-to-peer file sharing like on networks.
How does it work?
A cryptocurrency runs off of a network of peers. These peers keep a record of all transaction histories and every account balance. Ultimately, every participant within a cryptocurrency, like Bitcoin, has to keep track using what is called blockchain. It is a record of all transactions within the network that is public to everyone – the entire network can see every account balance.
When a transfer takes place, it is essentially a file made up of the sender and recipient’s keys, or their wallet address, along with the amount to be transferred. The keys are cryptography – coded messaged – that is broadcasted to the network. But before being transmitted, a minor must confirm the transaction, marking it legitimate then sending it into the network.
When a transaction takes place, almost immediately it is sent to the network in which everyone can see. It takes time to get the transaction confirmed by the minors. Once the transaction is confirmed, it is irreversible and cannot be forged. However, when the transaction is pending, it is vulnerable to being forged. That is why the confirmation by the minor is so important. This is how the transaction gets added to the blockchain.
Anyone can be a minor really. But to stop everyone from attempting to be one, which could lead to forging transactions and inevitably breaking the whole system, the founder set up specific rules to become a minor. As a minor though, for each cryptologic puzzle you complete (confirming a transaction), you receive payment.
Setting up cryptocurrency payments
Before you begin accepting cryptocurrency payments, you need to be set up to do so. There are two different ways to do this. You can either set it up on your own without using a third-party processor (the complicated way). Or you can sign up with a payment provider that does all the hard work of converting the currency for you (the more expensive route).
If you plan to set up payment yourself, you will need to manually setup a wallet and exchange accounts to receive payments. Depending on the type of wallet you choose, that will dictate the type of currency you can accept. The hard part then is programming everything needed to implement the payment: addresses, transfers, security and interface to make the payment.
If you don’t feel comfortable doing the programming required for setting up the payment, you can sign up with a payment provider. These companies do all the work for you. But be prepared for service charges. Some companies charge per transaction while others charge when you cash out your coins into your bank.
Properties of a transaction
There are five main properties of cryptocurrency payments that have made companies like Bitcoin so appealing (or not appealing depending on your take):
- Irreversible: Like mentioned before, once a transaction is confirmed by a minor, it is set in stone, and that is it. Nobody, not even a bank or the founder can change the transaction. The pro of this is that no one can forge it into another transaction. The downside, if you send your money to the wrong person, you’re out of luck.
- Pseudonymous: Although everyone on the network can see all transactions in the cryptocurrency world, no one actually knows who you are. Addresses which are chains of characters make the transaction.
- Quick transactions: Cryptocurrency transactions can take place anywhere, at any time and to anyone around the world. They are almost instantly sent into the network and only take a couple of minutes to be confirmed.
- Secure: Since cryptocurrency is made up through a cryptographic system, your key needed to make transactions is only viewable by you. The chain that makes up your key is almost impossible to break.
- No permission needed: Anyone can use cryptocurrency. You do not need to get permission from anyone to join or send transactions, and no one can stop you.