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Who are the Users of Cryptocurrency | What is Hashing and its Use in Cryptocurrency | What is Block and Block-Chain
Importance of Cryptocurrency?
The internet is always pouring out news about the acceptance, value, investment strategies, statistics and many other things about cryptocurrency. People all over the world as well as big companies are investing and trading in Cryptocurrency.
Recently, Vietnam has started to become active in the Crypto World and the current administration of the Vietnam is seriously considering to adopt cryptocurrency in their economy. Cashless payments are increasing and recognition of digital currencies by the Central bank would help accelerate this process.
Cryptocurrency has a lot of potential for being declared as the main medium to circulate money in the near future. Before making any kind of investment, people do some research. So in case you are wishing to go the Crypto way soon, we bring you some basic information that you must take note of.
Who are the users of Cryptocurrency?
According to an estimation in a report done in January 2021, around 106 million people are using Cryptocurrencies across the globe!
Many people are adding Cryptocurrency to their financial plans of investment. We learnt previously that cryptocurrency allows people to trade and invest from any corner of the world without the requirement of middlemen and just by having the suitable technology. And since technology is becoming more accessible, Cryptocurrency is gradually expanding its horizons.
There was an increase of 190% in the users from 2018 to 2020, that is, just within a span of two years.
Cryptocurrency market is quite volatile and keeps changing rapidly. Using it for bigger transactions also requires one to be well acquainted with the technology. This could be a reason for the fact that a majority of Cryptocurrencies users are young and lie between the age of 30 to 35 years. It will take some time for the older age groups to clear out the misunderstood notion of Cryptocurrency and adapt to it.
Most of these users are Businessmen, traders or technology experts. Hence, there stands a question before us. “Why must laymen consider investing or trading in Cryptocurrency?”
Well, to start with, it’s really important for us to know what is going on around us. Since Cryptocurrency is a potential alternative to Conventional Currency and it also has a lot of security, it becomes a good option for investment.
Let’s say you wish to buy a house. You shall find a broker and he will get the best deal for you. So you pay for the house and you pay brokerage as well. After some time, the house is in a condition such that it is becoming expensive for you to maintain it. So you will sell it off at whatever price is going on in the real estate market. Let’s say if you’re investing in and holding Cryptocurrency, there is no brokerage since there is no middleman. You can directly buy and sell from your wallet. And you can even hold your cryptocurrency and later buy it or sell it depending on the market situation. Additionally, rate of return is significantly higher compared to investing in any other business.
Investing in it is yet secondary, but educating ourselves about it is a primary objective.
What technology is used in cryptocurrency?
Let us now talk about a very important segment and that is technology. Even though it may be hard for us to understand it completely, knowing the basic concepts is really necessary before you start with Cryptocurrency.
The first one is Hash Value or the process of Hashing. So, Hashing is a mathematical process. It simply means, taking an input of any length and creating output of a fixed length.
So, the output is always smaller than the input and it is always of the same length. Also, it can never be reversed.
Let us take an example of the popular cryptocurrency, bitcoin - If we talk about bitcoin, then transactions are taken as an input and they go through a hashing algorithm which is Sha-256 (for Bitcoin) and next an output of a fixed length is received.The output received is called 'hash value'. No matter how long the input is, the output received by using sha-256 algorithm, will be of 256 fixed bit length. Also, it is to be noted that a slight change in the input will generate an entirely different hash value.
The hash function is commonly used for security purposes. In the Bitcoin protocol, hash functions are a component of the block hashing algorithm which is used to add new transactions into the block chain through the mining process.
What is Blockchain?
It is very important to understand the Hash function before moving towards Block and Blockchain. Whenever there is a discussion regarding the technology behind Cryptocurrency, Blockchain or block is mentioned.
So what exactly is a block? A block is a technical structure that holds data of a particular transaction. It includes three things, a hash of the previous block, a unique hash of its own and some data. This data is in an encrypted format or in the form of a code. A block is secure and difficult to crack or alter. The data inside will depend on the type of blockchain - as in if it is a private or public blockchain.
A hash value is unique. If you change the hash, which again is really difficult to do, the characteristics of the block will change as well. Each block is identified by its unique hash.
Moving on, let’s talk about the most important part of Cryptocurrency - the Blockchain technology. Apart from Cryptocurrency, this technology is also used to secure legal documents, medical data, secret information about countries and even in electoral systems. There was a need for a timestamp in Cryptocurrency. As in, something to detect the time, date and details of the transactions without disclosing the original data. That’s when blockchain stepped in. It helps detect and identify the ownership and involvement of a crypto user in a particular transaction.
So what exactly is it? As I said before, Block B will have a hash of Block A and Block C will have a hash of Block B. This goes on and a chain of blocks is created. Block A or the first one is called the Genesis block and all following blocks trace their lineage to it. If you make a change in a block, there will be a change in the hash and so you shall be changing the entire blockchain following after it.
It is also a distributed ledger. As in, whoever uses that cryptocurrency will be notified if a block is added to the blockchain. But the details of the transaction remain encrypted. In fact, it is impossible to retrieve the exact input data from a blockchain. Hence, it is connected, distributed and yet very very safe. There are various types of Blockchains - Public, Private, Consortium and Hybrid.
What is the function of Node in blockchain technology?
They’re pretty simple to understand, but they play an important role. A node is a computer or a system connected to a Cryptocurrency network. Any system who handles, adds or creates blocks or data, is called a node. A node validates or approves transactions and hence plays a major role. Since blockchain is a distributed ledger, each node on the network will be notified and receive a copy of the Blockchain. If one node receives it, it is broadcasted to others. You can see the characteristics of decentralization over here. There is no central or main node. The data is distributed and copied so that even if one node collapses, the rest retains the data. Imagine if all data was directed towards some specific nodes divided by region, if they would collapse, the entire system and the cycle would crash.
What is the cryptocurrency mining?
I am sure you all must have heard about the mining of minerals, but do you know that we use the term "mining" in reference to the cryptocurrencies as well?
Well, In the cryptocurrency industry, mining refers to the process of verifying bitcoin transactions and then recording them in the public blockchain ledger or simply, the process of generating new bitcoin is Bitcoin mining. It is the miners who validate the transactions by solving difficult mathematical equations, which is done by using high powered computers and hardware.
Miners include a network of participants who sit in the different parts of the world and compete within themselves to mine a specific transaction by solving complex puzzles. It is to be noted that the miner who solves the puzzle first, receives the reward in the form of a Bitcoin.
Let us try to comprehend the mining process in greater depth :
Consider yourself a miner, now once you are mining, computer correctly guesses the solution, your mining program determines which of the currently pending transactions will be grouped together in the next block of transactions. In simple terms mining can be also termed as a "Guessing game".
Accounting tip for the cryptocurrency:
Before ending today's program, I would like to add that We at InfoTaxSquare, report our cryptocurrency portfolio balance in our balance sheet, which has a significant impact on calculating our business's cash flow.