Over the last several years, the popularity of cryptocurrency (e.g. Bitcoin) has surged exponentially. It has entered the stock market, and many companies will allow customers to pay with it. What was once something no one had heard of is now increasingly popular, with businesses considering taking and making payments in cryptocurrency.
Since it keeps gaining status and the world has moved so far into a digital age, it would be beneficial to understand at least the basics of cryptocurrency. So here are some facts on this new form of payment, how it works and how you can use it for your payments in the future.
Cryptocurrency? What is it?
Cryptocurrency is a type of digital money. Cryptocurrency is entries in a database which stay unchanged till you fulfil particular conditions. This is just like with regular money you will have in your bank account. Its only after certain requirements are met, that you can take it out into real money and own it.
The first form, and most notable form of cryptocurrency is Bitcoin. It was established by Satoshi Nakamoto in late 2008 to early 2009, when he created a ‘peer-to-peer electronic cash system’. What this means is that there isn’t a one central server controlling everything. It is much like peer-to-peer file sharing like on networks.
How does it work?
A cryptocurrency operates on a network of peers. These peers maintain a record of all transaction histories and each account balance. Ultimately, each participant within a cryptocurrency, like Bitcoin, has to keep track using what is known as blockchain. It is a record of all transactions inside the network that is public to everybody – the whole network can see each account balance.
When a transfer takes place, a file is made up of the sender and recipient’s keys, or their wallet address, together with the amount to be transferred. The keys are cryptography – coded messaged – that’s broadcasted to the network. But before being transmitted, a miner must confirm the transaction, marking it legitimate then sending it into the network.
When a transaction takes place, it is almost instantly to the network through which everyone can see. It takes time to get the transaction confirmed by the miners. Once the transaction is confirmed, it’s irreversible and can’t be forged. However, when the transaction is pending, it’s susceptible to being forged. That is why the confirmation by the miner is so essential. This is how the transaction will get added to the blockchain.
Anyone can be a miner really. But to stop everybody from trying to be one, which might result in forged transactions and inevitably breaking the entire system, the founder set up particular rules regarding how to become a miner. As a miner though, for every cryptologic puzzle you complete (confirming a transaction), you receive a payment.
Setting up cryptocurrency funds
Before you start accepting cryptocurrency payments, you need to be set up to do so. There are two ways to achieve this. You can either set it up by yourself without using a third-party processor (the complicated method). Or you could enroll with a payment provider that does all of the laborious work of converting the currency for you (the costlier route).
If you intend to arrange payment yourself, you will want to manually setup a wallet and exchange accounts to receive payments. Depending on the kind of wallet you select, that may dictate the kind of currency you can accept. The laborious part then is programming all the pieces needed to implement the payment: addresses, transfers, security and interface to make the payment.
If you don’t really feel comfortable doing the programming required for setting up the payment, you’ll be able to enroll with a payment provider. These businesses do all of the work for you. But be ready for service fees. Some charge per transaction whereas others charge if you cash out your coins into your bank.
Properties of a transaction
There are 5 key properties of cryptocurrency payments which have made cryptocurrencies appealing:
Irreversible: Once a transaction is confirmed by a miner, no one, not even a bank or the founder can change the transaction. The benefit of this is that nobody can forge it into another transaction. The draw back – you’re out of luck should you send your money to the incorrect individual.
Pseudonymous: No one truly knows who you are, despite the fact that everybody on the network can see all transactions within the cryptocurrency world. Identities are masked by the addresses that are made up of chains of characters to make the transaction.
Quick transactions: Transactions are nearly instantaneous – taking only a few minutes to be confirmed. Transactions can happen anywhere, at any time and to anybody around the globe.
Secure: Since cryptocurrency is created by way of a cryptographic system, your key required to make transactions is only viewable by you. The chain that makes up your key is virtually impossible to break.
No permission needed: Anyone can use cryptocurrency. No need to get permission from anyone to join or send transactions, and nobody can stop you.