How does cryptocurrency work?
Transactions are sent between peers from “cryptocurrency wallets” by matching up public codes which relate back to user-held private passwords (AKA cryptographic “keys”).
Transactions made between peers are recorded on a public ledger of transactions called a “blockchain.” All users of a given cryptocurrency have access to the ledger if they choose to download a “full node” wallet (as opposed to holding their coins in a third party wallet like Coinbase). The transaction amounts are public, but who sent the transaction is encrypted. Each transaction leads back to a digital “cryptocurrency wallet.” Whoever owns the password (or key) to the wallet, owns the amount of cryptocurrency denoted on the ledger. When someone sends or receives cryptocurrency, when they send from one wallet to another wallet using a set of private and public passwords, that transaction is queued up to be added to the ledger. Many transactions are added to a ledger at once. These “blocks” of transactions are added sequentially. That is why the ledger and the technology behind it is called “block” “chain” it is a “chain” of “blocks” of transactions.
How does blockchain work? When a peer-to-peer cryptocurrency transaction is made, that transaction is sent out to all users with “full node” wallets. Specific types of users called miners then try to solve a cryptographic puzzle (using software) which lets them add a “block” of transactions to the ledger. Whoever solves the puzzle first gets a few “newly mined” coins as a reward. Sometimes miners pool computing power and share the new coins. The algorithm relies on consensus. If the majority of users trying to solve the puzzle all submit the same transaction data, then it confirms that the transactions are correct.