What is Cryptocurrency and Where does it come from?

Cryptocurrency is electronic money that is not of any particular country and not produced by any government-controlled bank. These electronic currencies are also known as Altcoins. They are based on cryptography. This currency is produced by a mathematical process so that it will not lose its value as a result of large circulation. There are different types of Crypto Currency such as Litecoin,   Bitcoin , Peercoin and Namecoin to name a few. The transactions using the digital currency are carried out using a mechanism called mining. The currency is generated in many, many computers with the help of software developed especially for this purpose. Once the currency is created, it is recorded in the network, thereby announcing its existence.

The way Cryptocurrency works is that instead of having one central authority who secures and controls the money supply (like most governments do for their national currencies), this work is spread out all across the network.

Miners collect the transactions on the network (like "Alice pays Karim 10 bitcoins" and "Liam pays Sofia 8.3 bitcoins") into large bundles called blocks. These blocks are strung together into one continuous, authoritative record called the block chain, which doesn't permit any conflicting transactions. This is necessary because without it people would be able to sign the same bitcoins over to two different recipients, like writing cheques for more money than you have in your account. The block chain lets you know for sure exactly which transactions count and can be trusted (so no bad cheques!). The way Cryptocurrency makes sure there is only one block chain is by making blocks really hard to produce. So instead of just being able to make blocks at will, miners have to compute a cryptographic hash of the block that meets certain criteria. Miners refer to this process as "hashing". The only way to find a cryptographic hash that's "good enough to count" is to try computing a whole bunch of them until you get lucky and find one that works. The miners who successfully create a block are rewarded some bitcoins according to a preset schedule. The difficulty of the criteria for the hash is continually adjusted based on how frequently blocks are appearing, so more competition equals more work needed to find a block. A modern GPU can try hundreds of millions of hashes per second, so to be competitive in this race to find hashes miners need specialised hardware, otherwise they will tend to spend more on electricity than they make producing Cryptocurrency.

In addition to the hash criteria, a block needs to contain only valid, non-conflicting transactions. So the other main task for miners is to carefully validate all the transactions that go into their blocks, otherwise they won't get any reward for their work! Because of all this work, when a cryptocurrency client signs on to the network it can trust the block chain that was most difficult to produce (since this is evidently the one that was being worked on by the most miners). If there was a "fake" blockchain competing with the real ones (say, where someone pretends but they didn't actually give Sofia those 8.4 bitcoins and they still have them), the fraudster would have to do as much work as the whole rest of the network to make their block chain look as trustworthy. So essentially, the intense work that goes into finding blocks through hashing secures the network against fraud. There is also, of course, some nifty code that figures out how to choose between conflicting transactions; and what to do if two people find valid blocks at the same time.

One last thing: why is it called mining? In the original analogy, people who performed this essential work were compared to gold miners digging the gold out of the ground so that everyone could use it. But in reality, Cryptocurrency "miners" are just running computer programs on very specialised hardware that automates the process of securing the network.

To sum it all up, special hardware and software:

• Collects transactions from the network
• Validates them, and doesn't allow conflicting ones
• Puts them into large bundles called blocks
• Computes cryptographic hashes over and over until if finds one "good enough to count"
• Then submits the block to the network, adding it to the block chain and earning a reward in return.

That is What Cryptocurrency is and where is comes from!

Origional article: http://bitcoin.stackexchange.com

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