WHAT ARE DIGITAL CURRENCIES OR CRYPTOCURRENCIES?

 

The term blockchain, or blockchain, or blockchain usually refers to a basic, publicly available registry that allows us to securely transfer ownership of units of value using public-key cryptography and various Proof of Work methods in a decentralized form to maintain the network so that it is not centrally controlled by a bank, company or government.

 

Cryptocurrency

In an era when the usual cash transactions were reduced to be replaced by electronic transactions and payments, the so-called digital currencies or encrypted assets Cryptocurrencies appeared, which despite the doubts that hovered around it in its beginnings - being virtual / electronic - but it was welcomed and increasingly accepted and demanded, which raised the prices of digital currencies to levels It was a standard that was impossible to imagine, and even made its way to international financial transactions, and it became the focus of curiosity and interest from everyone. In this article, we will shed light on it to demonstrate the concept of digital currencies and how to deal with them.

 

 We will address the issue of digital currencies through the following points

The concept of Cryptography

The difference between Decryption and Cryptanalysis

How did the idea of ​​electronic cash transactions begin?

The beginning of the idea of ​​digital currencies or cryptocurrencies

The birth of digital currencies

Advantages of digital currencies

Disadvantages of digital currencies

Most Frequently Asked Questions About Cryptocurrency

 

The concept of Cryptography

Before getting to know digital currencies or encrypted currencies, let's learn about cryptography, which is attributed to the method of creating and using those currencies.

Cryptography is originally a way to protect information and data through the use of codes, so that only those who are targeted by the information can read them or know their hidden content and have the cipher key that enables them to process those codes to identify the original information. The word cryptography can be translated by dividing it into crypt, which means hidden, and graphy, which means writing, meaning that the term means that it is written content in a way that hides its content.

That is, hiding data from its usual and current context to another context unknown to the public in a way that preserves the confidentiality of its content, and it is not a new process. The principle of encryption was used in many diplomatic and military fields in the past and has many banking and information uses in our contemporary time, until we reached the digital currencies that depend in Built on the same idea۔

The difference between Decryption and Cryptanalysis

Opposite to encryption, comes decryption, which is the return of the encrypted context to the image of the initial content in its usual and publicly readable context before the encryption process, and this is done using the encryption key.

With the development of mathematics, computer and communication sciences, the process of encryption and decryption has become based on complex computational algorithms that are difficult to solve, and even if the process of cracking the code or solving these algorithms - without decoding them in the way they were prepared from the beginning - is theoretically available, it is not possible to do Through the well-known and currently existing information means, which is why the assumption of its security and confidentiality has been proven so far.

This is known as cryptanalysis and means the study of decoding cryptographic algorithms and their applications to obtain the content and source of information or encrypted assets without access to the key required to do so.

That is, we can shorten the difference between decryption and cryptanalysis to that decoding means returning the encrypted codes context to its first state using the cipher key prepared from the beginning to re-translate these codes to what they were, while cryptanalysis is an attempt to decipher those codes By trial and error an incredible number of times to arrive at a cryptographic algorithm solution to translate the encrypted symbols and know the original context without knowing the key۔

How did the idea of ​​electronic cash transactions begin?

Proceeding from the idea of ​​encryption and decoding, as well as coding analysis, the idea of ​​creating digital currencies was born Cryptocurrency, that is, the digital virtual currency that has been encrypted for secure and confidential transactions, as it is created and stored electronically without a supervisory authority or a central bank controlling it, and it has no physical entity such as currencies Other regular or so-called mandatory cash issued by central banks such as the Saudi riyal (SAR), the euro (EUR) or the US dollar (USD).

The idea of ​​a digital or electronic alternative to the usual cash transaction began in the late eighties approximately in the Netherlands in a series of refueling stations or petrol stations on the highway in which many thefts occurred, and the administration tried to find a solution to this problem, so the administration hired a group of programmers and developers to link money to cards Especially through which drivers wishing to deal with these stations can obtain fuel from them without the need to deal with paper money in those stations, and thus there is no or at least the money will be significantly reduced from the stations in order to reduce cases of theft, after which the idea of ​​the birth of smart money cards developed, Which used to reflect the idea of ​​money saved in an electronic form encrypted in the card, while at the gas station there is a device to decode that code, which is the point of sales or what is known today as the idea of ​​POS or point-of-sale. This is the first image of electronic money that has evolved to reach what it is now.

The beginning of the idea of ​​digital currencies or cryptocurrencies

To complement the idea of ​​electronic transactions and almost at the same time or a little before, there was an idea wandering in the head of an American programmer named David Chaum, its content revolves around financial privacy and trying to simulate coins or paper into token money that has the same ability to deal in payments and move from hand To a hand safely and privately, he created an algorithm formula through which money could be passed between the sender and the recipient in a hidden and untracked way through a token currency he called at the time Chaum. 1998 in which he nevertheless laid a strong foundation for the idea of ​​algorithmic formulas for token cash transactions or cryptocurrencies.

To complement the same idea, another software called Wei Dai begins to put forward the idea of ​​an integrated, hidden, untracked monetary system that achieves the idea of ​​privacy and security, called B-money, where transactions are carried out through symbolic pseudonyms to analyze currencies within a decentralized network, and he has already presented the paper The whitepaper presented for his project, but the idea did not receive the welcome and desired popularity, so it was not successful. It is worth noting that the presentation paper presented by Satoshi Nakamura for the idea of ​​Bitcoin - which we will talk about in detail in a later article - contained some of the elements that were mentioned in the whitepaper The B-money project, which means that it was the real start of the race towards the development of cryptocurrencies.

The creation of digital currencies

After the path became paved for the creation of digital currencies, and with the development of technology and information, complex cryptographic protocols were born based on the principles of mathematics and advanced computer engineering that made it almost theoretically impossible to break. The programmers of digital currencies relied on them through very complex coding systems that encrypt data transmissions to secure units Its exchange, in addition to its ability to conceal the identity of its dealers, making transactions, transfers and money flows anonymous, in order to achieve the principle of privacy, which was the main endeavor from the beginning.

Thus, we can say that the digital currency is a software computer program, but it is a decentralized program, that is, it is not installed or built on one particular device, but rather it is distributed, which means that it is hosted on many computers for many individuals around the world instead of hosting on a single server by a specific individual or company.

The supply and value of cryptocurrencies are controlled by the activities of their users through highly complex cryptographic protocol codes. Every function or transaction, from how transactions are recorded to how data is stored, is reduced to a special code that is usually stored in a type of database known as a string. Blocks - Blockchain, which is a comprehensive, distributed, protected and hidden record of all digital currency data and transactions, and by processing these algorithms in general, the digital currency is given to the user who adds transactions to the blockchain network or the blockchain, and the process of adding transactions to the blockchain is known as mining .

It remains to be known that one of the most important characteristics of most digital currencies, but not all, is that they have limited numbers of units. That is, most digital currencies were produced on the idea that they have a market cap, that is, the process of encrypting the creation protocols from the beginning created a specific number of currencies With each decryption process - or mining by adding a transaction - the number of the stock gradually decreases, and this is similar to the idea of ​​precious metals, for example, the more gold is extracted, the less the reserve stored in the ground. It becomes difficult for miners to produce cryptocurrency units, until the upper limit is reached and minting stops completely.

To understand this in a simpler way, Bitcoin is one of the most famous digital currencies, and the most valuable currently, as a digital currency that has been encrypted from the beginning, provided that the code contains only 21 million pieces, and once all of them are mined or extracted, there will be no new Bitcoins, that is, there will be no Printing new money as it happens in other regular currencies, and this means that if you own 1 Bitcoin, it means that you own 1/21000000 of the total wealth of the world in Bitcoin.

Advantages of digital currencies

Below we list the most important advantages of dealing with digital currencies, which have emerged with its spread in the recent period

 

1. Protected from losing value, or inflation

Inflation is the scourge of the world’s economies, and many ordinary currencies have faced and face the threat of inflation, but the idea that digital currencies are produced on the basis of determining a market ceiling for them, and a limited amount of them, increases with the high demand for them their value in line with the market, and protects them from inflation in the long run. the long

 

2. Self-control and sustainable maintenance

Managing and maintaining any currency is one of the main factors in its development and sustainability. In cryptocurrencies, transactions are stored by miners in the blockchain network on their computers, and in return they get the same currency as a reward. Therefore, they keep transaction records accurate and constantly updated, which maintains the integrity of the digital currency and its decentralized record.

 

3. Security and privacy

It can be said based on what we mentioned in our article here from the beginning that they were the main motive for building digital currencies from the ground up, so the records of the Blockchain network are based on different cryptographic algorithms that are difficult to decipher or analyze. This makes the digital currency more secure than normal electronic transactions, in addition to using pseudonyms or account numbers that are not linked to any user, account or stored data that can be linked to a profile, in order to achieve the principle of privacy.

 

4. Easy currency exchange

One of the very important advantages, which gave digital currencies a real value in the middle of physical transactions, as it can be exchanged for regular currencies as a corresponding exchange value, which means that each has a variable exchange rate with the main global currencies - such as the US dollar USD, GBP, EUR or yen Japanese JPY - which helped in its spread, acceptance and demand as an alternative to regular cash transactions, and equivalent in value.

5. Decentralization

Unlike regular currencies or fiat currencies controlled by governments represented by central banks, digital currencies are decentralized in nature and cannot be controlled, increased, stopped dealing with, or made available except by those who use them and own the largest amount of them, or through the organization of their creation Or develop it before putting it on the market, which helps it preserve it from monopoly and protect it from determining the flow or value to ensure its stability, privacy, transparency and security

 

6. Low cost and speed of transfers

One of the main uses of digital currencies is the transfer of funds, and the cost or fees of transfers are one of the most important factors that are taken into account to judge the quality of a system or transfer process, in digital currency exchanges the transaction fees paid by the user are reduced to a small amount or maybe even zero and are directly between user accounts and quickly. So we do not need third parties, such as VISA or SWIFT, to verify the transaction. This eliminates the need to pay any additional transaction fees, or wait a long time.

 

Disadvantages of digital currencies

As it has advantages, dealing with digital currencies has some disadvantages that must be taken into account before dealing with or investing in them, and they are as follows:

 

1. It is easy to use in illegal transactions

Security and absolute privacy, which were the most important features that make it difficult for governments to track any user through his wallet address or know his data, and we may mention that Bitcoin was used as a means of exchanging money and financing in many illegal transactions, and some also use digital currencies to launder money that they obtained in a way Illegal through a clean medium to hide its source.

 

2. Loss of data can mean huge financial losses

Cryptocurrency developers wanted to create source code with untraceable encryption algorithms and unbreakable authentication protocols, with the aim of making keeping money via cryptocurrency more secure and confidential than traditional cash, but the flip side of this much privacy is that if a user loses the private key to access their wallet digital or its account, it cannot be restored. The wallet will remain locked on the coins in it, making it in the judgment of lost

 

3. Some digital currencies cannot be exchanged for regular currencies

Which loses it the advantage of the exchange as some digital currencies can only be traded against one currency or certain currencies. This forces the user to convert these digital currencies to one of the major currencies, such as Bitcoin or Ethereum first and then through private exchanges, and then to the currency they want. This only applies to a few cryptocurrencies, so fees or commissions may be added to additional transactions in the process, costing unnecessary money.

 

4. The negative effects of mining on the environment

Mining is a complex process that requires modern and sophisticated computers, which makes it energy-intensive. This cannot be done on normal computers. Bitcoin miners in countries like China that use coal to produce electricity, their work increases China's carbon footprint tremendously.

 

5. Cryptocurrency exchanges are vulnerable to hacking

Despite the security and privacy of cryptocurrencies, their exchanges are not that secure. Most exchanges store users' wallet data to properly operate their User ID. Professional hackers can infiltrate and access this data and also steal the digital currencies stored in it. Some exchanges, such as Bitfinex or Mt Gox, have been hacked in the past years and thousands of Bitcoins worth millions of US dollars were stolen. Most of the exchanges are currently very safe, but there is always the possibility of another hack.

 

6. There is no refund or cancellation policy

Financial dealing in digital currencies is like other financial transactions, if there is a dispute between the parties involved, or if someone sends money by mistake to a wrong wallet address, the sender cannot recover the digital currencies sent. This can be used by many scammers to steal money. Since there are no refunds or returns in the process, a transaction whose product or services were never received can easily be created.

Today, there are more than 1,324 encrypted digital currencies in the market, which, despite being an electronic virtual currency, has spread in electronic transactions on the Internet and has been accepted in many international stores, especially Bitcoin.