Basically, cryptocurrencies act as the currency of a ledger of many transactions, but some problems must be addressed to establish a valid ledger. - How do you prevent people from falsifying transactions? - How do you ensure that people follow through with payments? - How do you trust the ledger?
Background: a hash function has an output of a fixed length of bits that appears random but repeatedly gives the same output for a given input. It is computationally infeasible to determine the exact input given an output. - Individual sections of a ledger are called blocks. - Block creators find inputs to the hash function that yield some number of 0s at the beginning of the output. - This input is used to verify the block of transactions. - Block creators are given rewards for their work in the ledger currency out of “thin air,” which increases the overall amount of currency in the system. - Reward for miners decreases geometrically over time, meaning that there will be a fixed amount of the digital currency in circulation. - Transaction fees for miners incentivize them to include specific transactions in a given block due to restrictions in block size. Thus, a decentralized but trustworthy ledger system is established.