Where cryptocurrency comes from in simple words

History of appearance

Specialists since 1983 tried to realize electronic payments on the principles of cryptography. However, information about the first successful attempt to create something similar, which as a result became BTC, appeared only in 2008.

It is not known exactly who made this virtual coin. From the published data, the following was clear. The development of digital money was conducted since 2007 by a person or a group of people under the nickname Satoshi Nakamoto. Officially, the cryptocurrency appeared in 2009.

It took 2 years to create the Bitcoin payment system. Testing confirmed the performance of Satoshi Nakamoto’s network. He was able to transfer 10 bitcoins to the account of Hal Finney (the first BTC miner).

No one has been able to reveal the identity of the person or people under the alias Satoshi Nakamoto. History knows several dozen assumptions about the actual developer of the payment system. However, none of them has not been fully proven.

Types of cryptocurrencies

Objectively, there are only 3 types of digital money:

• Bitcoin. The first crypto asset in history.
• Altcoin. Represents any cryptocurrency that uses a unique protocol. Also, an altcoin is a fork or hardfork of a digital asset.
• Token is a unit of account. Replaces securities in the digital world. Keeps a balance in some assets. Some tokens are created on the ERC-20 standard blockchain protocol (from Ethereum).

You can read more about the types of digital assets here.

Hardfork is an update of the rules of the protocol (its improvement). It is characterized by the separation of the network. 2 independent systems appear. Hardfork is a hard separation of the blockchain. The result is always the same – the emergence of a new cryptocurrency. Nodes (from Latin nodus – “node”) turn out to be unable to process blocks in its network.

Where cryptocurrency comes from

Digital money doesn’t just appear. Cryptocurrency is generated through the work of miners and verification nodes. They perform different functions and are not interchangeable. Both groups of nodes are rewarded for creating and validating blocks.

Miners are the mining nodes of the network. They provide computing power to the system. This allows the blockchain to remain functional. Mining – unraveling blocks (links in the chain). The process is constant. People buy expensive equipment to do this. The work of miners is rewarded for each block mined.

Validators – verification nodes of the network. These nodes participate in staking, that is, they provide their finances to keep the blockchain running. No computing power is required.

Validation is the process of signing links within the network, that is, confirming them. Validation nodes receive a reward for each block mined. This approach is used in blockchains with the Proof-of-Stake consensus algorithm.

Mining

The term came into Russian from English and actually retained its literal meaning – mining. Because of this, the necessary equipment is often called a drilling rig.

Mining is the support of the functioning of the network. Mining nodes create new blocks in the chain. The main resource used is the computing power of computer equipment. Most mining farms run on GPUs (graphics cards). It is cheap and efficient to use external GPUs.

Features

Miners and entire mining centers cannot be subdued or blocked. The cryptocurrency system is decentralized. The network is supported by its participants.

Any owner of computing equipment can become a mining node. To do this, you need to properly configure your equipment and connect it to the blockchain. There are many relevant guides on the Internet.

Mining is anonymous. The mining node is not obliged to provide personal data. It is impossible to track the participants of the entire network.

Mining is limited by the algorithms set by the miner. It is impossible to mine more coins than the system allows. Experts have estimated that the last BTC will be mined in 2140.

Mining is a type of business. Mining nodes are rewarded. Earned cryptocurrency is put on the market. It can be sold and exchanged, withdrawn into fiat or paid for purchases.

Methods of mining

There are many methods to mine cryptocurrency. The owner of the node can choose them at his personal discretion. Here are a few ways:

• Mining pools. Previously, a single computer could quietly create blocks on the network. However, with the increase in complexity, this task has become impossible. Therefore, miners combine computing power into pools – a single server. Hundreds of participants work on solving a single blockchain link. All miners in the pool are rewarded. The total profit is divided among them according to the principle of “how much power invested, how much digital assets earned”. The figures are counted in percentages.
• ASIC mining. Major digital assets like bitcoin, etherium and lightcoin can be mined using special equipment. It is called ASIC – integrated circuit chip. It solves only one task. To mine ETH coins, you need to buy an Ethereum ASIC. It cannot be used for mining BTC.
• Mining on GPU (external graphics processor). The most popular method. Such mining involves the exploitation of video cards. The method allows you to mine coins that have resistance to integrated circuits. Such cryptocurrencies are called ASIC-resistant.
• Mining on the CPU (central processing unit). At the dawn of the development of BTC was the only mining method. It was proposed by bitcoin developer Satoshi Nakamoto. This method exploits the power of the central processing unit. It is characterized by lower power efficiency and speed. As of September 23, 2021, few coins can be mined using this method.
• Mobile mining. Inefficient and not popular. It is implemented by altcoins with small capitalization to recruit users on the network.

Every year ASIC equipment is updated and becomes more powerful.

Older machines are proving to be uncompetitive. ASIC mining is unprofitable after the release of new machines, so you need to buy fresh equipment.

Increasing complexity

The hash rate of the network is increasing daily. Logically, the emission should be accelerating. However, this does not happen because of the unsophisticated algorithm for increasing the complexity of mining. As the hash rate of the network (the number of calculations per second) increases, the task of crypto miners becomes more difficult.

The difficulty of mining shows how many calculations are needed to solve a block. On the Ethereum network, this number is over 9 quadrillion – approximately 9,250,000,000,000,000,000,000,000,000,000,000,000,000. One hash equals one computation.

Cloud mining

The method is somewhat similar to pools. Only this method does not require the purchase of computing equipment. In this case, it must be rented.

Mining enterprises are large remote data processing centers. They have at their disposal all kinds of equipment for mining (GPU, CPU, ASIC and others). Sometimes such organizations provide some of the equipment to renters for a fee.

If a blockchain participant cannot buy computing equipment, then it is better to borrow a part of the hash power of a large mining center for temporary use.

ICO

Initial Coin Offering – Initial Coin Offering is a way to attract investors. The concept is identical to the term “crowdsale”.

In an ICO campaign, a fixed number of coins are sold. However, it is not clear where the new cryptocurrency comes from. It is developed specifically to attract funding and further support for the project. For ICO-coins are generated one-time or in an accelerated mode.

What it is

ICO is an analog of IPO (initial public offering of shares). Both procedures are aimed at attracting investors. Only crowdsale is not everywhere controlled by state regulators.

However, the buyer of coins can be sure of their receipt. Organizations conducting ICOs are required to officially register and provide investors with documentation.

Reasons for holding

The purpose of an ICO is to obtain funding for the development of a cryptocurrency project. Many digital assets are initially created to solve specific problems of network participants. For example, the TWT token is made by the developers of the Trust Wallet cryptocurrency wallet to give users the opportunity to:

• Participate in project management.
• Work with collectible coins.
• Support developers of new dApps (decentralized applications).
• Use discounts on project services.

To realize their ideas, developers need funding. Therefore, an ICO is held in the process of creating the project. Investors interested in the prospects can put money into the organization by buying digital assets.

The future of cryptocurrency

Digital money is evolving rapidly. Stablecoins (assets backed by traditional currencies with a peg to their exchange rate) like USDT are starting to replace some of the transfers between countries. Global economic conditions allow for this to happen. Experts predict an average annual growth rate of 11.2% for digital money.

Payment systems have become more willing to conduct transactions involving such assets. This ensures constant growth of the digital money market. Soon, the recognition of cryptocurrency as internet acquiring will have a positive impact on the adoption in people’s lives.

By 2030, 99.9% of the present projects are expected to disappear. A part will cease to meet the practical needs of the network participants. However, every day a new cryptocurrency appears. Therefore, the total number of different digital assets will only increase.

Blockchain technology is greatly simplified by new software. This makes it possible to promote cryptocurrencies noticeably more efficiently. You don’t need any special knowledge to use digital money.

Frequently Asked Questions