Cryptocurrency is a digital or virtual currency that is secured by cryptography, making it almost impossible to counterfeit or double-spend. Cryptocurrencies are generally not issued by any central authority, making them theoretically immune to government interference or manipulation. They are typically fiat currencies, as they are not backed by or convertible into a commodity. Cryptocurrencies use decentralised control as opposed to a central bank digital currency (CBDC). Records of ownership of individual coins are stored in a ledger, which is a computerised database that uses strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.
In a proof-of-stake model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Typically, these token owners gain additional ownership of the token over time through network fees, newly minted tokens or other similar reward mechanisms. Cryptocurrencies do not exist in physical form (like paper money) and are not usually issued by a central authority. When implemented with decentralised control, each cryptocurrency operates through a distributed ledger technology, typically a blockchain, which serves as a public database of financial transactions.
You can use cryptocurrencies to buy normal goods and services, although many people invest in cryptocurrencies as they would in other assets, such as stocks or precious metals. Although cryptocurrencies are a new and exciting asset class, buying them can be risky, as you need to do a lot of research to understand how each system works. Cryptocurrencies typically use proof-of-work or proof-of-stake to verify transactions. Each participating computer, often referred to as a 'miner', solves a mathematical puzzle that helps verify a group of transactions known as a block and then adds it to the blockchain.
The first computer to do so successfully is rewarded with a small amount of cryptocurrency for their efforts. This race to solve blockchain puzzles can require a great deal of computing and electrical power. In practice, this means that miners can barely break even on the cryptocurrencies they receive for validating transactions, after taking into account the costs of energy and computing resources.
To reduce the amount of energy needed to verify transactions, some cryptocurrencies use a proof-of-stake verification method. With proof-of-stake, the number of transactions each person can verify is limited by the amount of cryptocurrency they are willing to 'bet', or temporarily store in a community vault, for the opportunity to participate in the process.
Everyone who stakes crypto is eligible to verify transactions, but the odds of being chosen to do so increase with the amount one advances. If a stake owner (sometimes called a validator) is chosen to validate a new set of transactions, they will be rewarded with cryptocurrencies, potentially in the amount of the aggregate transaction fees of the block of transactions.
To discourage fraud, if you are chosen and verify invalid transactions, you lose a portion of what you have wagered. Both proof-of-stake and proof-of-work rely on consensus mechanisms to verify transactions. This means that, although everyone uses individual users to verify transactions, each verified transaction must be checked and approved by a majority of the ledger holders.
For example, a hacker would not be able to alter the blockchain ledger unless he can get at least 51 of the ledgers to match his fraudulent version. The amount of resources required to do so makes fraud unlikely. Mining is the way in which new units of cryptocurrency are released into the world, usually in exchange for validating transactions.
While it is theoretically possible for the average person to mine cryptocurrencies, it is increasingly difficult in proof-of-work systems.