Cryptocurrency is like a form of digital money. It is a way of making payments from person to person without any organisation or institution in the middle to facilitate it. For example, if you want to pay a dog groomer, you’d either need to use cash produced and distributed by the Royal Australian Mint or a bank transfer facilitated by the payer and payees’ banks.
If, however, your dog groomer accepted Bitcoin, you could pay from your digital wallet to theirs almost instantly without any fees to a middleman, even if your dog groomer lived half-way across the world.
With cryptocurrency, the infrastructure which makes payment possible is decentralised—no single person, group or interest controls it. It all works using blockchain technology. Blockchains are immutable digital ledgers maintained by volunteers, governed by communities of ordinary people and distributed to anyone who wants to get involved.
Volunteers offer their time and effort to run specialised computers in exchange for the chance to earn cryptocurrency, and encryption technology makes it practically impossible to cheat the system. When you carry out a transaction with cryptocurrency, volunteers around the globe make a record of it in their copy of the relevant ledger. When a certain number of transactions are recorded, a block of those transactions is added to a long chain of previous blocks representing the chronological history of transactions in that currency.
To add a block to the blockchain, you first need to validate it. To do this, you must either correctly guess a 64-character, alphanumeric string with trillions of possible combinations or stake your own cryptocurrency for the opportunity.
If you’re lucky enough to be chosen—either because your computer rig was powerful enough to make the correct guess (or the closest guess within a 10-time limit) or you staked enough of your assets to tip the odds in your favour—you’ll need a 51% majority of the volunteers to agree yours is an accurate record of the transaction.
If you tried to claim there was more cryptocurrency in an account than there actually was, the majority would reject it. In order to cheat the system, you’d have to control at least 51% of the votes on the network. In either case, the cost would be prohibitive for any of the larger blockchains, like Bitcoin or Ethereum.
When your block is added to the blockchain, you’re rewarded with a small amount of a given cryptocurrency. There are no cryptocurrency coins or notes, there are only records of transactions keeping track of who owns which assets.
Cryptocurrencies can be used to pay for goods and services, traded for other cryptocurrencies, or held onto for speculative purposes.