How do cryptocurrencies work: features and algorithms

How do cryptocurrencies work: features and algorithms

Table of content:

Features of the digital currency
How cryptocurrency works: algorithms

The first cryptocurrency appeared on the Internet five years ago, and since then hundreds of other electronic money have joined Bitcoin, but so far few know what it is like, how cryptocurrency works and why it attracts so much attention.

Features of the digital currency

Perhaps the main reason for the popularity of the digital currency is its decentralization and the resulting features. DC (digital currency) is not serviced by any central bank, and as the Bit prefix in the progenitor of all digital money hints, works on the principle of decentralization in the network. If any bank itself is the main monitor of the reliability of money transfers in a large bank, then in the DC such network participants are ordinary users.
For users, the main advantage of DC is the speed of transactions (sending money from one user to another). If you have ever made a bank transfer to another country, you know that this, in itself, is a complicated procedure, which can also take several days. The notification of the transfer of the DC occurs virtually instantaneously, and the transfer is confirmed within a few minutes (for some DCs it is less than a minute).
Another advantage of DC is almost a zero cost of translations. If banks charge a certain fee for their services, up to several percents, then the DC is transferred from the account to account for free.
Despite their dislike of DC, large banks and money transfer systems have recently begun to reckon with its appearance. For example, eBay, the owner of Paypal, putting spokes in DC wheels, forbidding their sale at auction, literally the other day refused such a restriction, and now there is a special section for cryptocurrency on eBay.
An obvious advantage of DC is anonymity. If a plastic card is attached to a passport, then the electronic wallet is just a set of symbols, which in itself will not output even to the mailing address. And if you install and use such a basic security tool as Tor, then tracking transfers becomes impossible to even in theory.
The lack of centralization and central authority brings some disadvantages to DC. For example, all transactions are irreversible (if no intermediary is used). That is, there is no possibility to apply to a bank and cancel the transfer. Money goes in one direction, and opportunities to return it without the consent of the recipient does not exist.
As for the other most frequently mentioned shortcomings, cryptocurrencies, which are mostly voiced by new users, there is usually mentioned a useless waste of enormous computing power and energy to maintain the functionality of Bitcoin and other currencies.
You can look at this statement in a different way. For example, the value of ordinary money, at least in theory, should be provided by something else, in our case, gold. In the world, the value of coins is in some sense guaranteed by the cost of energy spent for mining, and by the means spent on buying mining equipment.
As for the uselessness of calculations, first, there are coins that produce useful calculations. For example, during Primecoin mining, new prime numbers are searched for, and Gridcoin does connect directly to the Boinc project to participate in distributed computing aimed at solving physical, astronomical, biological, medical and other problems. Well, secondly, huge processing power of Bitcoin is not wasted, but it ensures the reliability of all transactions, and guarantees the protection of the network against possible hacker attacks, which are possible only if the network is connected to even greater processing power which is almost impossible, given the funds spent on specialized mining farms that have reached colossal productivity in the past few years. Without the same processing power, younger DCs are vulnerable to various attacks and some have already been exposed to them in the recent past.

How cryptocurrency works: algorithms

In the vocabulary of DC there is the term BlockChain. In plain language, this is a book containing records of all remittances for all time. Suppose that this book is available for 1 million computers. If one of the computers sends a false message about the transfer of coins to another address (for example, to pay for goods in the online store), the other network members will simply not accept this statement. Monetary transactions must be supported by appropriate signatures, which cannot be counterfeited.
In the world of cryptocurrency, there are two main algorithms: SHA256 and Scrypt. SHA256 is the algorithm of Bitcoin and several of its clones. Initially, Bitcoin’s mining took place on processors, but over time, programs appeared that learned how to use video cards, which significantly improved the efficiency of mining. After that, the so-called ASIC (Application-specific integrated circuit) was developed – the boards optimized solely for the calculation of hash functions using the SHA256 algorithm and useless in all other senses.
ASIC cards are an order of magnitude more efficient than video cards, and they use less magnitude electricity. In principle, the disadvantage of ASIC-cards is reduced only to their high cost (for a fee with sufficient performance will have to lay out a few thousand dollars), and after their performance is uncompetitive, in connection with the release of a new generation of ASIC, it is difficult (almost impossible) to find application in connection with their narrow specialization. In other words, they will have to be resold for nothing or sent to scrap.
After the high cost of ASIC-boards led to the fact that only enthusiasts could work out the bitcoins, there was an idea to create a new algorithm called Scrypt, the main feature of which would be resistance to GPU and ASIC mining.
At first, Scrypt, as it was planned, worked only on processors, but the first applications for video cards appeared quickly. At first, it seemed that the output of specialized ASIC for Scrypt really is impossible. The fact is that for calculations using SHA256, a small amount of memory is required, while Scrypt requires much more memory available both in the computer and in modern video cards. The demand for a large amount of memory makes the development and production of Scrypt ASIC not so much impossible as it is unprofitable, since adding the required amount of RAM to the boards makes them more expensive than the video cards (at least that was considered a while ago).
The first DC on the algorithm was Litecoin, and since the source code of this currency remained open, after a while there was a real boom of altcoins (alternative coins is a common name for all DCs that appeared after Bitcoin).
Despite the attempt to defend themselves against Scrypt ASICs, all efforts were eventually in vain, although many did not believe in the possibility of their appearance until the very end. Nevertheless, they are available on sale from the beginning of this year, although the first models traditionally lose in the price/performance ratio to conventional video cards.
The first Scrypt ASIC was comparable in performance to top-end processors (up to 100 Kh / s), but released after one or two months ASIC-cards of the next generation caught up with average video cards costing $ 200 (400 Kh / s). In the meantime, in a couple of months, the first “titans” with a performance exceeding the total capacity of several hundred Radeon 290x (100-200 Mh / s). The current existing ASIC (400 Kh / s) has more than 5 watts and connects directly to USB-ports, while video cards with the same performance draw from the PS about 200 W.
SHA256 and Scrypt algorithms are the most popular among DC, but there are also others, for example, Scrypt-N – another attempt to create a hard nut for ASIC-boards. The prefix N in the name means that at certain intervals (months or years) the amount of memory needed to search for hash functions is increased by N times (usually two), which does not exclude the possibility of creating ASIC boards for mining but does their development is even more unprofitable.
Also, there are CPU-only coins, which at the moment, and perhaps in principle, cannot be mixed with anything else than processors, which makes them more “popular”, as for the mining it does not require to purchase expensive graphics cards or ASIC-cards.
We described the main features of how cryptocurrency works, however, it is important to understand that this activity is risky and at the same time can bring a good income.