Cryptocurrencies are digital currencies that are generated by computing and can be used as a store of value and a medium of exchange, much like cash. It’s a contraction of “cryptographic currency” which means that it uses cryptography—a branch of mathematics devoted to securing communications—to keep it secure.
Cryptocurrencies are created, spent and received using a network of computers around the world that work together to maintain a public record of these transactions. The transactions are then entered into a data structure called a blockchain.
What’s a Blockchain?
Bitcoin was released in 2009 and is the largest and oldest example of a cryptocurrency produced with a blockchain. A blockchain contains “blocks” of transactions that follow certain rules to ensure the transactions are legitimate, and those transactions are bundled together. Blocks are then connected together on the network to form a “chain” of transactions extending backwards chronologically to the first transaction ever made with that cryptocurrency.
Consider your bank statement.
Each month you see all the transactions and amounts—both deposits and withdrawals—tracked by your bank. This type of record-keeping is called a ledger. If you tried to spend more money than you had in your account, the bank wouldn’t allow it, since they would look at the ledger and realize you don’t own enough money for the transaction.
That ledger is completely controlled by your bank, which requires you to trust them completely, while giving them a lot of personal information. A blockchain is a way to transfer value digitally without needing to trust in a bank, or any institution. This is possible because there is still a ledger keeping track of deposits and withdrawals, but this ledger is distributed across all the people in the network.
Each time you try to send a transaction, everyone else is verifying you have the money you say you do.
Unlike the bank records or manual ledgers someone may keep, once transactions are validated and entered into a blockchain it’s almost impossible to change them. No one can bake a blockchain’s books!
It requires energy for computers to verify these transactions are legitimate. Why would people devote their computers to doing this? Because when they do this verification they are entering these new transactions into the blockchain in a process called mining which will occasionally reward them by giving them new coins. This is how new coins are created in the system, which provides an incentive for there to always be people verifying transactions. Miners may also choose to collect transaction fees as a part of this process to increase their incentive.
All of this transaction information is public and able to be viewed by anyone. If that sounds a little scary, don’t worry. It’s not like your bank statements being made public, because those are tied directly to your specific real-world identity and could lead to someone else taking control of your account and spending your money. Some cryptocurrencies are more private than others, but most of them aren’t tied directly to your identity like a credit card.
All of this transaction information is public and able to be viewed by anyone. If that sounds a little scary, don’t worry. It’s not like your bank statements being made public, because those are tied directly to your specific real-world identity. Some cryptocurrencies are more private than others, but most of them aren’t tied directly to your identity like a credit card.
How can transactions be public but not reveal my identity?
Even though it’s digital, cryptocurrency use works much like cash. You don’t need to let someone know your name or account number number to give them cash for something. It’s assumed that, because you have the cash to give in the first place, you “own” that cash and have the authority to use it.
What do I really “own” when I own cryptocurrency?
You own cryptographic keys that work together to prove your ownership of coins in a certain location on the blockchain.
Your public key is an alphanumeric string that creates an address which is publicly visible and connected to your transactions on the blockchain. Every time you send or receive coins using these keys that is a transaction.
Your private key is also a long, alphanumeric string that is generated before your public key and it is very important to keep it safe. It does important work behind the scenes to prove your ownership of your coins and let you use them. They’re a bit like your signature on your checks.
This is much more secure than writing a check to someone or handing them your credit card, though! With checks and credit cards, whomever you’re interacting with can see your entire account number & verification points—like your CCV or your signature—printed right on them, which makes it pretty easy for a crook to rip off or forge.
How do I get and manage cryptocurrency keys?
Many people get their first cryptocurrency by using their national currency to purchase them from another person or an exchange like Coinbase. With an exchange you will get some convenience features but there are fees attached to this kind of transaction and it has implications for your privacy since they require you to give them a lot of your personal information.
The way we recommend getting cryptocurrency is to earn some by selling items or services privately on Haven!
To manage your cryptocurrency, there is software that is simply and appropriately called wallets where people can store their keys and do additional things easily, like see the balance of coins they have, send and receive payments, and keep their coins safe.
Most wallets make keeping your keys safe a little easier by generating a seed phrase you can use to restore your data in case of a technical issue or to easily move your keys to other wallets. This seed is generally a list of words that is much easier to write down and verify than the dozens of numbers and letters that make up the keys.
Haven includes an integrated multicoin wallet and you can back up the wallet by writing down your seed phrase in Settings. Under Advanced tap Backup to get started.
How do I send and receive cryptocurrencies?
A public key that was properly derived from a private key can be used to generate an address which can be shared with others for sending and receiving coins. This is another thing wallets help you with. This address can also be translated into a QR code that is easy to scan with a mobile device to send funds to it.
I want to know more!
There’s definitely a lot more going on under the hood of cryptocurrencies and the technology is novel and fascinating. If you’d like to learn more about how blockchains work technically check out these resources:
- Jameson Lopp as built this incredible library of information about Bitcoin
- Coin Center exploring the difference between Bitcoin and Facebook’s Libra coin
- From the Haven blog: How Private Will Facebook’s Libra Currency Be?
And of course, please stay connected to the Haven blog as we will be continuing to share more information about cryptocurrencies. Please bring any questions you have to our communities around the web! Find us on Slack, Telegram and Twitter.
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