What's the difference between Cryptocurrency and fiat currency? Table of Contents
The characteristics of virtual currencies are summarized below.
However, it should be noted that the following description is based on Bitcoin, which is a typical example of virtual currencies.
1. There is no central administrator
Unlike fiat currencies, virtual currencies basically do not have a centralized issuer or manager that guarantees their value.
The feature is that the credit of the central bank guarantees the value in a different way from the legal tender that guarantees the value by the mechanism called blockchain that monitors the transaction with all participants by P2P.
2. There is an issuance limit
In the case of legal tender issued by the central bank, the number of issued currency can be changed according to the economic situation of the home country.
On the other hand, there is no central administrator for virtual currencies, and it is basically impossible to change the number of issued cards.
Therefore, many virtual currencies have a maximum issuance limit and are designed to maintain the value of money.
For example, in Bitcoin, the maximum number of issued coins is set to 21 million.
3. Can be cashed
In the case of electronic money, the mechanism is such that it cannot be converted into legal tender such as Japanese yen, but the virtual currency can be bought and sold at the market price at that time.
Technical components of cryptocurrencies
Taking Bitcoin, which is a typical example of virtual currency, as an example, its technical components are organized.
Bitcoin is a mechanism that allows you to trade value on the Internet without the intervention of a third party such as a bank.
We will omit the technical details, but to briefly explain the mechanism, “public-key cryptography” prevents spoofing by a third party, and “blockchain” prevents double payment by the parties.
It can be said that the point is that “mining” provided an economic incentive called mining reward to miners (miners) who contributed to the operation of the blockchain.
The above components will be described in order below.
1. Public-key cryptography
The public key cryptosystem is an encryption method in which the encryption key can be disclosed by using separate keys for encryption and decryption.
In public-key cryptography, a pair of keys, a “public key” and a “private key,” is issued.
The public key is generated from the private key, but the reverse is not possible.
Anyone can use the public key freely, but only the owner of the key can use the private key.
When sending Bitcoin, a character string called “address” is generated from the public key, but in the Bitcoin system, a “public key” that anyone can use is used to generate the address.
By using a “private key” that can only be used by the user himself as a signature for executing transactions, spoofing by a third party is prevented.
2. Blockchain
Blockchain technology was born in the process of Bitcoin development as a technology to realize a decentralized ledger that records Bitcoin transactions.
Transaction data is called a “transaction”, and a collection of multiple transactions is called a “block”.
The data structure in which these blocks are chained is the origin of the name blockchain.
Unlike the general client-server method, in the case of blockchain technology, transaction data is monitored by an unspecified number of participants in the network, so even if double payment by the parties occurs, fraud is immediately fraudulent.
It will be discovered and discarded as invalid data.
3. Mining
Mining is simply the process of adding blocks to the blockchain.
Bitcoin mining work employs a consensus algorithm called PoW (Proof of Work).
This is a mechanism that uses a cryptographic hash function (SHA-256) to perform mathematical operations in order to activate the blocks generated by itself.
The miner collects transactions to generate new blocks while validating the transactions.
Approval work is performed that transactions that can be recorded in the block are recorded.
When this approval work is completed, it will be recorded on the blockchain as a formal block.
When the mining work to generate the block is completed, the miner who is the creator of the block can receive the block generation fee and the transaction fee recorded in the block as the mining reward.
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April 24, 2024
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