What is Cryptocurrency?

9 Feb 2024

How Do Cryptocurrencies Work?
How do cryptocurrencies transfer value digitally between two trustless parties, then? It does so by combining two concepts of blockchain technology – digital signatures and hash functions – to create a tamper-proof trail of who owns what in order to avoid the double spend problem.

Double Spend Problem
Since cryptocurrencies are decentralized and digital, the key problem faced is how to prevent someone from making more digital copies of their digital tokens and spending it twice or even more times. This is called the Double Spend Problem.

This problem doesn’t exist with paper money because if the transaction is in cash, there is finality as once the recipient has the paper bill in their hands, the spender no longer has it, so they cannot double-spend with it.

Similarly, with a bank transfer, for example, once the money has been moved from the sender’s account into the recipient’s, the sender cannot take the money back without the recipient’s authorization. Bank transfers also require a centralized party to deduct the funds from the sender’s account and deposit them into the recipient’s. So there is no risk of double-spending in this caseHash Functions in Cryptocurrency
What is a Hash Function?
A hash function is a mathematical function that converts any digital data into an output string with a fixed number of characters. Hashing is the one-way act of converting the data (called a message) into the output (called the hash).

Hashing is useful to ensure the authenticity of a piece of data and that it has not been tampered with since even a small change in the message will create an entirely different hash. either.

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