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A beginner’s guide to how cryptocurrencies work

Whether you’re on the head or tail end of the cryptocurrency craze, one thing is for sure: These digital assets are hitting the mainstream hard, and don’t seem to be going away anytime soon. Notably, the country of El Salvador recently adopted bitcoin as legal tender, and New York’s incoming mayor Eric Adams is intent on transforming New York City into a hotspot for cryptocurrency.

Advocates for cryptocurrency and decentralized finance (where people can make financial deals with one another without being moderated by a middleman or central authority like a bank) in general argue that these platforms are transparent and simultaneously anonymous—both good things.

The key to this vision lies in a digital technology called the blockchain, which undergirds all cryptocurrencies. The blockchain serves as a virtual hall of records, or a public ledger, that records every transaction, detailing the amount as well as the sender and receiver’s wallet addresses.

Yet, critics and regulatory bodies are worried about the potential for harm from cryptocurrencies, such as people using them for scams, money laundering, or funding illegal activities (not to mention the enormous carbon footprint that some of these cryptocurrencies have—The New York Times reported that Bitcoin burns through more electricity than certain countries). And experts have raised concerns about the strength of cryptocurrency networks against attacks, and whether the design of some systems have warped over time to become centralized or inherently allow the rich to get richer.

To start at the front end, this is what happens when you send and receive cryptocurrency. Keep in mind that all cryptocurrencies are just based on computer programs, bitcoin included, and that these “coins” are not actually money, but clippings of computer code that transfer value from one user to another. To become a part of this process, first you have to create a digital wallet. Bitcoin and Ethereum both have recommendations on what wallet works best with their cryptocurrency, and specialty exchanges like Coinbase and Gemini also offer wallets.

Whenever you create a new wallet, the algorithm running that cryptocurrency will generate a paired private key and public key associated with it. You can think of the public key as like an address or bank account number, and the private key proves your ownership. The public keys are a long string of characters that identify where the crypto should go. Usually, the addresses only accept the type of cryptocurrency they’re affiliated with (although something called cross-chain bridges and exchanges can help link up different cryptocurrencies).

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