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  • There's Bitcoin.

  • There's Litecoin.

  • There's Ethereum.

  • So just what is cryptocurrency, and how does it work?

  • Essentially, it's digital money that's bought and sold online.

  • There's no bills or coins.

  • It's not based on another asset like gold.

  • And it doesn't go through traditional

  • financial institutions like banks.

  • Instead, these currencies operate

  • in a completely decentralized system

  • that uses so-called blockchain technology

  • to track transactions.

  • To see how this works, let's look at how

  • you'd buy something with cryptocurrency.

  • Say that Alice wants to buy a bike from Dan

  • using Bitcoin, her cryptocurrency of choice.

  • Alice begins by logging into her Bitcoin wallet

  • with a private key, a unique combination

  • of letters and numbers.

  • With a traditional financial transaction,

  • the exchange gets sent to banks on each side

  • who record the money being subtracted from one account

  • and added to another.

  • But remember, in this scenario,

  • there are no banks or middlemen.

  • Instead, Alice's transaction

  • is shared with everyone in the Bitcoin network.

  • These networked computers add Alice's transaction

  • to a shared list of recent transactions, known as a block.

  • Every 10 minutes,

  • the newest block of transactions is

  • added on, or chained, to all the previous blocks.

  • That's how you get a blockchain.

  • To ensure that each block of transactions

  • on the chain is verified,

  • a subset of Bitcoin's network joins a race

  • to solve a very difficult math puzzle.

  • And if they solve it first, their record

  • of the block of transactions becomes the official record.

  • They're rewarded with Bitcoins of their own,

  • and the network gets a new block on the chain.

  • This entire process is known as mining.

  • But instead of chipping away at rock,

  • you're solving complex puzzles.

  • The fact that many computers are competing

  • to verify a block ensures that no single computer

  • can monopolize the Bitcoin market.

  • To ensure the competition stays fair and evenly timed,

  • the puzzle becomes harder when more computers join in.

  • The Bitcoin protocol says mining will continue

  • until there are 21 million Bitcoins in existence.

  • That's set to happen around 2140 —

  • if Bitcoin lasts that long.

There's Bitcoin.

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How Cryptocurrency Works | NYT

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    Rachel Kung posted on 2018/04/03
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