How do cryptocurrencies work?

Cryptocurrencies have several characteristics that differentiate them from traditional financial systems. One of these characteristics is that they are not regulated, controlled or protected by any institution and do not require the intervention of any intermediary during transactions. To control these transactions, cryptocurrencies make use of a decentralized database, blockchain or accounting record.

Cryptocurrencies are not backed by a banking entity, central bank or any public authority, so they are even less supported by customer protection methods.

Regarding the operation of digital currencies, we must remind you that once any transaction with cryptocurrencies is carried out, it is not possible to cancel said operation, because the blockchain is a record that does not allow data to be deleted. If you wish to reverse a transaction, it will be necessary to execute the opposite one.

Since cryptocurrencies do not exist physically, it is necessary to use a cryptocurrency wallet or digital wallet service, which is also not regulated to store them.

Basics to understand how cryptocurrencies work

To understand how cryptocurrencies work, it is necessary to know and understand several basic concepts:

• ✅ Decentralized computers: this means nodes spread around the world with copies of all the transactions that have been made.

• ✅ Miners: These are people who are part of the nodes, and who have the incentive that every time new Bitcoins are generated, they are distributed among those who are part of these nodes.

• ✅ Exchanges: These are companies that allow you to exchange currencies such as euros or dollars for Bitcoins and enter the world more easily. When you get them, they are stored in 'Wallets' or digital wallets, these are applications that allow you to save or exchange them.

Each cryptocurrency has a different algorithm, these do not repeat each other, with this the management of the number of new units that are issued each year is achieved. An example of this is Bitcoin , which every four years the amount generated is reduced by two, and it is established that only a total of 21 million Bitcoins are issued, after that amount, no more will be generated.

This is what makes it very different from conventional currencies, since the banks that issue and regulate conventional currency modify its value at will. This gives it more freedom to generate a certain value compared to other currencies that can be devalued when the banks indicate so.

Blockchain

A network of decentralized computers is known as a blockchain . Its blocks or nodes are connected and protected using cryptography . Each block links to a previous block, as well as a date and transaction data, and by design, these block chains cannot modify said data.

So, it's as if this blockchain were an open, public ledger where all the transactions made by two users are recorded. When we make a transaction, this data is recorded in a block, and it is automatically compiled and joined with the rest. This means that the data cannot be modified or manipulated, unless the rest of the blocks are modified, which is extremely complicated.