Digital currencies are constantly talked about these days. But despite their rising popularity, many people still do not know what cryptocurrency (also known as digital currency) means, and why these currencies are used in today’s world.
The most important feature of digital currency is its decentralisation i.e., no particular institution, organisation, or government controls it.
As a result, governments are no longer involved in managing and advancing existing projects in the blockchain network. The China blockchain is a vast network through which digital currencies are exchanged.
It is possible to use different types of digital currencies for different financial transactions, from different parts of the world. Public and private keys are required to perform any digital currency transaction on a large scale.
These keys increase the security of operations with digital ciphers. In fact, transactions with cryptocurrencies are performed using a transaction path encryption processes.
In traditional, digital transaction methods, a large amount is received as a fee for the exchange of currencies and transactions by intermediary financial institutions and banks. But doing different activities with different types of digital currencies is no longer such a problem. This means that such financial transactions are possible in return for a very small amount of commission now.
Few people are aware of the origins of digital currencies. Bitcoin (BTC) is the most famous digital currency and it has been created by Satoshi Nakamoto.
The identity of this person is not completely known. There are theories which state that it may be a fake name for a group of people who have produced and designed the first digital currency.
BTC happens to be the first and most important digital currency. It is more exposed than other types of digital currencies. More precisely, it is receiving a lot of attention in the digital world. It determines the price of other currencies and therefore, has tremendous effects on the path that other digital currencies take.
Before the idea of designing and producing digital banknotes came to the fore, BTC was introduced as a currency in which there was no intermediary (banks and other financial institutions) between the sender and the recipient, to trade and carry out various financial transactions.
All kinds of digital currencies are produced through mining by experts. Mining can be understood as the process of extraction by these experts, who use sophisticated methods and computers to do so.
There is something known as a “hash” which comes into play when extracting digital currency. A hash is actually a mechanism that links each block of information in the Chinese blockchain network to its previous block.
Digital currency miners do their job by generating each block and adding it to the blockchain. Advanced computers are needed to be able to extract digital currencies. This process also consumes a lot of electricity.
The high power consumption used to extract digital currencies has become a major concern for miners. Some governments believe that this amount of electricity will be really costly.
Let us understand the process of extracting digital currency in seven steps:
Step 1: A user makes a transaction through the cryptocurrencies in their wallet and tries to send their desired digital currency, or token, to someone else.
Step 2: This transaction is distributed through the wallet program and it waits to be selected by a miner on this Chinese block. This transaction is suspended in the “unverified transaction pool” until a miner selects it.
This pool is a collection of unverified transactions on the network, awaiting processing. Unapproved transactions are not usually collected in a large pool, but in small, classified pools.
Step 3: The miners in the network (sometimes called ninety) select the transactions from these pools and form them into a “block”. A block basically contains a set of transactions, which does not include unverified transactions at the moment, in addition to some additional information such as digital signatures, timers etc.
Each miner creates his own transaction block, and several miners can select the same transaction to be included in their block.
For example, consider two miners A and miner B. Both miners A and B can decide to include transaction X in their block. Each China block has its own maximum block size. In the blockchain of BTC, the maximum block size is 1 MB. Before adding a transaction to their block, miners should check whether the transaction is eligible for execution, given China blockchain history.
If the sender’s wallet balance is adequate as per their records, the transaction is considered valid and can be added to the block. Miners usually prioritize a transaction that has a high transaction cost, as it provides a higher reward for them.
Step 4: Miners create a block of transactions by selecting certain transactions and adding them to their block. They need a signature in the blockchain to add a block of transactions. This signature, also known as proof of work, is made by solving a very complex mathematical problem and is unique to each block of transactions. Each block has a different math problem.
So, each miner will work on a different issue specific to his block. Each of these problems is so difficult to solve that it requires a lot of computing power and electricity. This process is called mining.
Step 5: A miner who can find the first eligible signature for his block, will publish this block and its signature to other miners.
Step 6: The other miners must now verify the signature’s validity using the distributed block data and check whether the output hash matches the existing signature. If they match, other miners will validate it. As a result this, the block can be added to the Chinese block.
In fact, the miners reach a consensus that they all agree on. Hence, it is called the “consensus algorithm”. Once the signature has been published and all the computing power has been used, the block can be added to the China block. It is then sent to all other nodes on the network.
Other nodes accept this block and store it in their transaction data, as long as the transactions in the block are correctly matched to the current wallet balance (transaction history).
Step 7: Once a block is added to the chain, the “confirmation” of the blocks which get added after it counts.
For example, if your transaction is registered in block 502 and the Chinese block has 507 blocks, it means that your transaction has five confirmations: 502 to 507.
The reason it is called confirmation is that every time another block is added after it, the Chinese block again reaches a full consensus on the transaction history, including your transaction and your block.
As a result, you can say that your transaction has been verified five times by the blockchain. This is exactly what the “etherscan” site refers to when displaying your transaction details.
The more verified your transaction is i.e., the deeper a block is in the chain, the harder it will be for hackers to change it. After a new block is added to the China block, all miners must start again from the third stage and form a new block of transactions.