Cryptocurrency trading is the act of speculating on cryptocurrency price movements via a CFD trading account, or buying and selling the underlying coins via an exchange.On the distributed ledger, a collection of transactions is usually arranged into a ‘block’. Blocks are usually heavily encrypted, hence the word cryptocurrency, and they are turned into complex mathematical puzzles.
For example, if it is the Bitcoin blockchain, a miner will get rewarded in Bitcoins. This is, by design, how new cryptocurrency coins are created.
Mining thus controls the speed at which coins are created (or the supply). By theory, with more supply, there is the threat of devaluation of the underlying coins. To prevent this, the puzzles are designed to get harder when more blocks are built.
But there is also another reason why mining is important. Mining ensures the accuracy and fidelity of transactions, which is imperative because once a transaction is added on the distributed ledger, it cannot be altered. This introduces the Proof of Work concept, which as the name suggests, is a system of validating work and proving that it is indeed correct.
Miners commit a lot of computational resources to find the answers to the mathematical puzzles. With Proof of Work cryptocurrencies, the puzzles are designed to be hard to solve, but very easy to verify or prove that it is correct. It is this Proof of Work that validates a cryptocurrency coin or gives it value.
Despite the foolproof nature of the Proof of Work system, there are some limitations. You will require hardware with huge computational power to increasingly solve harder puzzles, and this makes the process of mining expensive. This will also likely mean that only big players can be incentivised to do mining, which defeats the entire decentralisation aspect of cryptocurrencies.
So, in summary, cryptocurrencies are basically digital coins that run on a distributed ledger system. They are produced by miners who have specialized hardware designed to solve mathematical puzzles before a transaction is verified and added on the distributed ledger where it now becomes immutable. The idea of work giving value to a cryptocurrency coin is what is known as the Proof of Work system.
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