The document provides an introduction to cryptocurrency, explaining some key concepts:
- Cryptocurrency uses cryptography to allow for digital currency transactions over the internet without a central authority. This aims to build a decentralized cash system like physical money transfers.
- Blockchain technology is used to securely record all transactions in a way that maintains authenticity and prevents double spending. Transactions are grouped into blocks and added to the blockchain in a linear order.
- Miners on the cryptocurrency network verify transactions by solving complex math puzzles. The first miner to solve a puzzle is rewarded with new coins, incentivizing them to secure the network. Specialized computer hardware has become necessary to mine as puzzles increase in difficulty.
2. Understanding currency
What is the difference between a plain sheet of
paper and 10 rupee note that you hold today?
Why is it that the 10 rupee note can be used?
3. Answer :
The 10 rupee note is accepted nationally and issued by the
RBI.
It is also called as Fiat Money which means to say it has no
intrinsic value but we use it because a central authority (RBI)
says it has value.
This is different from commodity money(U.S currency) where
money could be exchanged with the bank for an equal
amount of gold or silver.
4. Today that is not possible.
The value of the fiat money is specified by the government
which issues it and not its value in gold or silver.
So we cannot use the traditional method of going to the
bank and exchanging a 1000 rupee note, sorry,500 rupee
note for an equal amount of gold.
5.
6. Question : What is the difference
between physical transfer of money
and online transfer?
7. Difference between Physical Money Transfer and
Online Transfers :
Physical Money could be exchanged from person to person
without the interference of any third party.
Online Transfers have to always take place with the
involvement of a third party which is usually the bank.
The entire power lies with them. They can control each and
every action of yours and all your privacy details lies with
them.
8. Major disadvantage of the current nature
of Online Transactions:
The transactions are very national in nature.
Most transactions people perform on a day-to-day basis are
within the country and in the same currency.
Any transaction done with a foreign client requires the user to
have an international debit/credit card which is not readily
available.
This proved that there is a need to have a global currency
which can be used by everyone.
9.
10. CryptoCurrency
General understanding :
Cryptocurrency is a digital currency used by
people as a medium of exchange over the
Internet without any central authority and makes
use of Cryptography.
It is a global currency.
11. Aim of CryptoCurrency :
The main aim behind the innovation of the
CryptoCurrency is that they wanted to build a
decentralized cash system just like transacting physically
with people.
A centralized cash system is when there is a presence of
a central authority who is continuously monitoring you in
each and every transaction and the power of every task
lies with them.
12. Question :
What is the most fundamental job of a
centralized cash system ?
13. The main job of a centralized system.
To avoid double payment,i.e to avoid spending the same amount twice.
Each transaction made by a customer is verified by a central authority and the
appropriate amount of cash is deducted or added to the account and stored in the
database.
So how is this possible in a decentralized
network?
14. The cryptocurrency network is a
“Peer-to-Peer Electronic Cash System”.
Every single entity in the network needs to do the job what
the central server actually does which means every single
entity must have a record of all the transactions that have
taken place throughout the entire history.
This is where Cryptography comes into play.
16. Popular CryptoCurrencies existing today :
(1)Bitcoin
(2)Litecoin
(3)Ethereum
(4)Zcash
(5)Dash
(6)Ripple
(7)Monero
Fun Fact :
There are over 1300+
Cryptocurrencies existing
today.
The first Cryptocurrency
that was started was
BitCoin in 2009
17. What makes a CryptoCurrency different?
(1)Hashing Algorithm used
(2)Privacy and Security
(3)The number of coins that can be mined
(4)Reward for mining
(5)Mean block time
And many more.
18.
19. BITCOIN
(1)Started in 2009, the first form of Cryptocurrency
that ever existed.
(2)You cannot reverse a transaction using
BitCoins.
(3)There are only a finite number of bitcoins and
the number is 21 million out of which 14
million+ have already been mined.
20. (iv) Bitcoin transactions make use of SHA-256 algorithm.
(v) The mean block time of a transaction is 10 minutes which
is comparatively faster compared to some cryptocurrencies
but slower to some currencies like Litecoin.
21. Question :
Is 21 million really enough ?
There are billions of people in the entire world.
How would each person have a share of the
Bitcoin?
22. Answer :
Each bitcoin is divisible to the 8th decimal place, so each
BTC can be split to 100,000,000 units.
Each unit of a BTC or 0.00000001 BTC is called a Satoshi.
Satoshi is the founder of BitCoin.
So in other words, there are 100,000,000 Satoshi in a BTC.
23. A Typical Bitcoin Transaction :
At the very depth , this is how the transaction file would look on each peer. Each
peer must maintain a copy of this ledger to participate in the bitcoin transactions.
24. A Typical Bitcoin Transaction :
(1)Let’s say Alice wants to send 5 Bitcoins to Bob.
So the money in Alice’s account must reduce and Bob’s
must increase
25. Nodes on the network apply the operation on to their ledger,
pass on the same copy to all the nodes in the network.
26. Maintaining authenticity of the transaction :
How to verify that the transaction card came from the rightful
owner?
This is where Digital Signature is used to prove the
authenticity of the rightful owner.
27. Every digital signature is unique and involves a high level
of math in its algorithm.
You can look up the term Elliptic Curve Digital Signature
Algorithm to understand more.
28.
29. To verify that Alice’s account actually contains 5 BTC, it
makes use of all the previous transactions where Alice
received 5 BTC.
These previous transactions are also called as reference
transactions.
30.
31. So the ownership of BTC takes place in a chain like structure where you backtrack to the linked transactions.
This chain is also called as the transaction chain.
32. Main aspect of transactions
One of the major concerns for transactions to take place smoothly is the
Ordering of transactions.
If the transactions are not processed in the right order, it could easily result in a
double payment and the entire network could be corrupt
33. To ensure correctness of transactions, the BTC network uses
the concept of BlockChain Technology.
In simple words ,Blockchain is a digital collection of records
which is used to store all the transactions in the P2P
network.Each peer in the network has the blockchain stored
on their system.
34. There could be new blocks added to the blockchain but how to decide which one?
35. In order to add a new block to the chain, the transaction block must contain a special
field called random number which must help to find the answer below a certain value
using SHA-256.The first person to solve this hash, broadcasts it and the block gets
updated on all nodes.
36.
37. Fact :
It takes about 10 minutes on average to find solution to a
particular math problem when everybody on the network tries
to solve this special math problem.
38. What is Mining in a CryptoCurrency Network?
Creating new coins of the same currency by verifying
transactions.
This is done by solving high end math problems(puzzles) with
the help of special softwares.The people who solve them are
called miners and the first miner to solve this puzzle gets a
small reward of the currency.
Any human being can be a miner, it requires no qualification.
39. Why do we need miners ?
In simple words , miners in the network help to verify
transactions and keep the blockchain network safe from any
kind of fake transactions.
40. The pool of computers can solve the problem collectively and share the reward
equally once it has been solved.
41. What do miners make use of to mine?
(i) At the very beginning people used their laptops and
computer to solve these puzzles since the number of
transactions were lesser and problems were easier.
(ii) The number of transactions kept increasing and as a result
the math problems kept getting tougher as a result of which
people needed systems with higher CPU power running
throughout the day.
42. (iii) People also explored the use of computer graphics cards
to mine bitcoins since they discovered it would solve the
problems at a faster rate.
(iv) Today we have ASIC(Application Specific Integrated
Circuit) chips are specially designed to mine bitcoins since
they do it at a much faster rate.