What are cryptocurrencies? And why should you use them?

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3 Δεκ 2013 (πριν από 3 χρόνια και 9 μήνες)

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What are cryptocurrencies? And why should you
use

them?

Cryptocurrencies
, like Bitcoin and Litecoin,

are peer
-
to
-
pee
r networks which form a
digital currency

and transactions network
. These networks are

secured by

cryptography. A
decentralised network
of
nodes is responsible for creating

new currency and validating transactions. The
ir

supply is

also
controlled by particular nodes called miners
.

In general,
cryptocurrencies

are designed to have

a
limited supply

in order to keep

the currency scarce and va
luable
.

Who produces

the currency?

In proof
-
of
-
work cryptocurrencies n
ew currency is rewarded to use
r
s known as miners. Miners use
computing power

to solve complex m
athematical

problems
to sign transactions. Once a miner has
found a solution to these probl
ems, their node will broadcast a block of

transactions to the network.
Once the network has agreed the solution is valid,

the block is added to the existing blockchain and

the miner is rewarded new currency.

The blockchain can be

compared to
a digital ledg
er which
contains a record of all transactions made across the network. Overtime the

reward

for mining

blocks

is programmed to decrease and as more miners compete to produce the next new block the
difficulty of doing so is increased.

Where
the digital mone
y is

stored and how

are mon
ey transactions possible on across the

networks?

Through the use of software called wallets, users can

store and

send currency to anyone

who also
owns a wallet and is connected to the network.

A user simply

provides
their

public address and they
can receive transactions from the network.

There are a number of different wallets available
including desktop, mobile or cloud applications.

Each type of wallet has its own security benefits and
risks.

Where can I buy or sell cryp
tocurrency?

You can either contact networks users to deal with in person or you can use exchange websites
which match y
ou offer against an order book
.

So what are the benefits of using cryptocurrencies

over cash, credit cards and banking
?

Cryptocurrencies

could be compared to electronic cash
in

that transactions are
pseudo
-
anonymous.
If no one knows the owner of an address it is not possible to link a transaction to a person.

However
through careful analysis of the blockchain an owner of an address maybe r
evealed.

A benefit of
cryptocurrency over cash is that money can be sent anywhere in the world
very fast
.

B
enefit
s

of cryptocurrencies over credit card
s
include

the lower transaction fees. T
he
fees

from

a

transaction are collected by

the

miner who
included

th
at

transaction in his next block. Another
benefit is that when making a payment through a cryptocurrency network, you do not hand over the
control of your money. To spend your cryptocurrency a person requires your private key which
cannot be obtained fr
om your public key.

The benefits over

the

banking

system

are very sig
nificant. There are no
requirements, in most
cryptocurrencies, to have a wallet to store your money. There is also

no one to stop

you from
withdrawing

money

from

your
wallet

at any time.
Transaction times are also very fast depending on
which cryptocurrency you decide to

use
. There is no waiting for a bank to process your transaction.
The only time you have to wait to send and receive your money is the time for your transactions to
be acce
pted by the network. This
does

vary

for each cryptocurrency. In Bitcoin transactions

can
become visible within 10

minutes an
d

are usually accepted within an
hour
. Litecoin transaction can
become visible within

2.5 minutes and are usually accepted within 20

minutes.

Also, the supply of money in cryptocurrencies is controlled and limited. In the UK banking system,
there is no limit to how much
bank credit (money) private banks can issue as debt. In an economy
based on cryptocurrencies there would be potential
ly less risk of recession caused by banks not
producing enough credit.

Are there any risks or security issues with cryptocurrency?

Yes, as with many systems. There are particular attacks which can be performed on a network. One
particular attac
k is called a 51% attack. To perform a 51% attack a user must control a majority of
the
mining power
. If this user could then produce enough new blocks in a row without interruption
they could start to modify the existing blockchain. This type of attack be
come
s

more difficulty and
expensive as the competition for mining increases. Provided a node is well connected to the
network, it is very difficult to cheat the system and spend money you don’t actually have.

Another security issue can arise if a user does

not practice safe behaviour when using their wallets. If
another person gained access to your wallet, through the use of malware or other access to the
machine, they could spend your money. This can be prevented through encryption and secure
behaviour. Pr
ovided a wallet is well encrypted, no one can spend your money without your
password. The
re

are other options to using digital wallets such as offline wallets and cold wallets.
For example a paper wallet

is good secure alternative
.


If a user loses

all cop
ies of their wallet and did not have a record of their private keys, all the money
in that wallet would be forever lost and unrecoverable.

Another risk is the exchange rate of the cryptocurrency. As there is no central authority operating to

back up


the
currency its value is determined by markets and traders. All cryptocurrencies

are
known to
have volatile prices
.

Resources and websites

Information’s sites

Bitcoin.org, Litecoin.org
, blockchain.info
,
en.bitcoin.it/wiki/Trade
,
L
itecoin.info/Service_Director
y

Cloud Wallets

Coinbase.com,
blockchain.info/wallet
,
coinjar.io

Payment Processors

kojn
-
app.com
, bitpay.com
, coinbase.com

Exchanges

Localbitcoin.com, bitbargain.co.uk

Real
-
time Exchanges

Mtgox.com

(untrusted)
, BTC
-
e.com, dagensia.eu (fully licensed),
bitstamp.net
, ibwt.co.uk
,
coinfloor.co.uk
,
bittylicious.com

Other information can be found through search engines and wiki