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What Are Cryptocurrencies Like Bitcoin Or Ethereum Are | Touchstone Words

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What the Heck are Cryptocurrencies like Bitcoin or Ethereum are

By Shane Staret on 2017-09-08

Towards the beginning of the current decade, a brand new currency mysteriously began to gather lots of attention—Bitcoin.

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Many of you are probably familiar with the phenomenon that is Bitcoin. If you are not, it is a cryptocurrency—a digital currency that uses cryptography to ensure the anonymity of the parties involved with the transaction. In other words, Bitcoin can essentially be used to buy/sell anything you want without it being able to be traced back to you. Except...that really isn’t all that true. But, the popularity of the currency has only grown since it launched in early 2009. Today we will investigate exactly what has caused Bitcoin to become and remain so remarkably popular and why it may be worth it to take a look at this innovative form of currency.

 

The general history and the reasoning for the creation of Bitcoin are not well known. Someone with the pseudonym “Satoshi Nakamoto” registered the “bitcoin.org” domain in 2008 and released his source code for Bitcoin to the public. In January of 2009, he established the Bitcoin blockchain—a continuously growing record of transactions that are secured through encryption and cryptography—by mining the first ever Bitcoins.

 

What is mining? It is processing and compiling recent transactions through solving a difficult mathematical problem so they can be established within the blockchain. Whoever “solves” the problem first and is responsible for putting the recent transactions on the chain will be rewarded with a small amount of Bitcoin. That is, as long as other miners can verify the person actually solved the math “puzzle”.

You may be wondering why a difficult math problem needs to be solved in the first place and what these problems even are. Well, you see, these “problems” really are not math problems at all. Rather, the computer that is attempting to mine a block to put into the blockchain just emits many random numbers. The first computer to guess the random number correctly “wins” and is awarded the benefits of creating that blockchain. It is actually a little bit more complicated than that so let’s look at an example. Say that in order for a block to be verified, a miner has to generate a number that is 10 or less out of the numbers 1 to 100. This would give him a 10% chance each time the computer spews out a new number.

 

Eventually, the computer guesses 2. A hash code is then generated, which can be used to verify that the miner correctly guessed the right number, however, it cannot be used to determine what that number actually was due to encryption. That is, unless someone discovers that P actually equals NP, but that is a whole ‘nother topic that you may be tempted to delve into. However, the chance that a computer correctly guesses the random number actually slightly goes down for every 2016 blocks that are mined. This is intentional and an extremely general explanation is that this prevents inflation. As the number of mined blocks increases, the number of Bitcoins also increases, and by raising the difficulty, the system can essentially regulate the number of Bitcoins being produced at any given moment. So for our example, after 2016 blocks are mined, only the first 9 numbers may be accepted instead of the first 10, making the chances of guessing a correct number decrease by 1%. In reality though, the range of numbers is much, much larger than just 1-100. Otherwise, the Bitcoin limit would have been reached within 140 days (2,016 * 10 * 10 / 60) / 24), as a full block is mined approximately every ten minutes.

After processing all of the information I just tossed at you, you might consider setting up your own mining rig or investing in Bitcoin. However, beware, there are a mega crap ton of scams out there that have successfully stolen millions of dollars from inexperienced cryptocurrency users. So please, for the love of all this is holy, do research to determine what sites are legitimate and which are not. Personally, I use Coinbase, however, there are still major risks when investing in Bitcoin, as the market is extremely volatile.

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