One of the biggest misconceptions about cryptocurrencies is that where the coins are stored. Most people assume that they are locally on the computer. This would be the most obvious answer, but unfortunately, it does not solve the problem of possible duplication. Anyone could easily copy the records representing the coins, and in the end, no one knows who owns anymore.
The Distributed Cash Book
This problem is solved differently with cryptocurrencies. There is a distributed cash book (blockchain) in which all previously taken transactions are stored. This cash book is distributed to all fullnodes and is constantly updated with the new transactions. A so-called consensus mechanism ensures that the network decides on a very specific version of the cash book.
Most users have access to the cash book via a wallet. This saves the keys or the associated account addresses to the coins and usually additionally acts as a lightnode. This means that the cash book is not local, but the wallet establishes a connection to a network node (fullnode), which constantly updates the cash book and makes the necessary queries, such as the current account balance on it. The operation of a full node is quite resource-intensive and thus, for example, difficult to execute with mobile devices. Therefore, over time certain functions have been outsourced to Lightnodes.
The account addresses are alphanumeric and in principle cannot be judged about the identity of the owner. Carelessness in dealing with them, such as the repeated use of the same address or the interaction of these with a service that knows the identity, can cancel the anonymity.
When a user wants to send coins, he creates a transaction and signs it with his private key. The whole thing is then forwarded to the connected fullnode. This first checks whether the signature matches the address and whether the credit balance of the account is sufficient. If everything is alright, the transaction will be declared on the network.
QR codes and other features make the user’s handling a lot easier. You get nothing from the signing and administration of the addresses. The wallet only shows the account balance and you can send or receive coins with a few mouse clicks or a barcode scan.
Everyone should protect their wallet with a password to prevent unauthorized access to the credit. In addition to software firewalls that exist on the local device, there are also online wallets, such as Blockchain.com that are managed by a web interface.
The coins are not local but are stored in a distributed database in the form of transactions. Each transaction has a sender and a recipient. Thus, all transactions that have ever taken place are coherent to everyone. The keys of the participants are managed in a wallet. This makes the system pretty secure. Even if several cash books were to be manipulated, enough valid ones are in circulation that represent the honest status.
Disclaimer: This information should not be interpreted as an endorsement of any cryptocurrency. It is not a recommendation to trade. The crypto market is full of surprises and overhyped assets. Do your research before buying anything. Do not invest more than you can afford to lose.
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Disclaimer: The authors of this website may have invested in crypto currencies themselves. They are not financial advisors and only express their opinions. Anyone considering investing in crypto currencies should be well informed about these high-risk assets.
Trading with financial products, especially with CFDs involves a high level of risk and is therefore not suitable for security-conscious investors. CFDs are complex instruments and carry a high risk of losing money quickly through leverage. Be aware that most private Investors lose money, if they decide to trade CFDs. Any type of trading and speculation in financial products that can produce an unusually high return is also associated with increased risk to lose money. Note that past gains are no guarantee of positive results in the future.
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