How does crypto work in 2025? A guide to blockchain & digital currencies
Understanding the basics of cryptocurrency and blockchain technology is essential for anyone looking to invest, use, or simply learn about this revolutionary technology. In this guide, we’ll break down the key concepts, from blockchain and cold crypto wallets to mining and staking, and explore how cryptocurrencies like Bitcoin and Ethereum function.
What is cryptocurrency?
Cryptocurrency is a type of digital or virtual currency that uses cryptography for security. Unlike traditional money issued by governments (like the US dollar or the euro), cryptocurrencies operate on decentralized networks based on blockchain technology. This means no central authority, such as a bank or government, controls the currency. Instead, transactions are verified and recorded by a network of computers (nodes) spread across the globe.
Some of the most popular cryptocurrencies include Bitcoin, the first and most well-known cryptocurrency, and Ethereum, which introduced the concept of smart contracts and decentralized applications (dApps). Other notable cryptocurrencies include Ripple (XRP), Litecoin, and Cardano.
How does blockchain work?
A blockchain is a decentralized, distributed ledger that records all transactions across a network of computers. Here’s how it works:
- Blocks: Transactions are grouped together into blocks. Each block contains a list of transactions, a timestamp, and a reference to the previous block, forming a chain of blocks—hence the name “blockchain.”
- Cryptographic hashing: Each block is secured using cryptographic hashing, a process that converts data into a unique string of characters. This ensures that once a block is added to the blockchain, it cannot be altered without changing all subsequent blocks, making the blockchain highly secure.
- Decentralization: Unlike traditional financial systems, where a central authority oversees transactions, blockchain operates on a peer-to-peer network. This decentralization ensures that no single entity has control over the entire network, enhancing security and transparency.
How crypto transactions work
To send or receive cryptocurrency, you need a crypto wallet. A wallet is a digital tool or physical device that allows you to store, send, and receive cryptocurrencies by managing its private key. Wallets come in two main types:
- Hot wallets: These are connected to the internet and are more convenient for frequent transactions. However, they are also more vulnerable to hacking.
- Cold wallets: These are offline wallets, like the Tangem Wallet, which store your private keys offline, making them much more secure against online threats.
When you send cryptocurrency, you create a transaction hash that includes the recipient’s wallet address and the amount you want to send. The transaction must be signed using your private key to authorize the transfer. This digital signature verifies ownership and ensures that the transaction cannot be altered. Once signed, the transaction is ready to be broadcast to the network for validation and confirmation.
How transactions are verified
Transactions are verified through a process called consensus. The two most common consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS).
- Proof of work (PoW): Used by Bitcoin, PoW requires miners to solve complex mathematical puzzles to validate transactions and add them to the blockchain. The first miner to solve the puzzle gets to add the block and is rewarded with cryptocurrency.
- Proof of stake (PoS): Used by Ethereum and other blockchains, PoS selects validators based on the number of coins they hold and are willing to “stake” as collateral. Validators are chosen to create new blocks and validate transactions, reducing the need for energy-intensive computations.
Other consensus mechanisms
- Delegated proof of stake (DPoS): In DPoS, users can delegate their staking power to other participants, who then validate transactions on their behalf. This system is designed to be more democratic and efficient.
- Proof of authority (PoA): PoA relies on a small number of trusted validators to confirm transactions. This mechanism is often used in private or consortium blockchains where trust among participants is high.
Crypto mining and staking
Crypto mining is the process of validating transactions and adding new blocks to a blockchain using computational power. Miners compete to solve complex mathematical puzzles, and the first to find a valid solution gets to add the next block.
In PoW networks like Bitcoin, miners use specialized hardware (ASICs) to perform millions of calculations per second. The winning miner is rewarded with newly minted cryptocurrency and transaction fees.
Mining secures the network by making it costly and computationally difficult to alter past transactions, ensuring decentralization and preventing double-spending.
However, mining requires significant computational power and energy, making it expensive and environmentally taxing.
Staking is an alternative to mining used in PoS networks. Instead of solving puzzles, validators are chosen based on the number of coins they hold and are willing to “stake” as collateral. Validators are responsible for confirming transactions and adding them to the blockchain. In return, they receive rewards in the form of additional cryptocurrency.
Real-world use cases of cryptocurrency
Borderless payments are the major real-world applications of cryptocurrency, but crypto’s use cases are expanding.
Payments and remittances
Cryptocurrencies like Bitcoin and Litecoin are increasingly being used for payments and remittances, especially in regions with limited access to traditional banking systems. Cryptocurrencies offer a faster and cheaper way to send money across borders.
Smart contracts and decentralized applications (dApps)
Ethereum introduced the concept of smart contracts, self-executing contracts with the terms of the agreement directly written into code. Smart contracts enable the creation of decentralized applications (dApps) that run on the blockchain, offering a wide range of use cases, from finance to gaming.
Store of value and hedge against inflation
Cryptocurrencies, particularly Bitcoin, are often seen as a store of value, similar to gold. With a fixed supply of 21 million coins, Bitcoin is resistant to inflationary pressures that affect traditional currencies. Unlike fiat money, which central banks can print in unlimited amounts, Bitcoin’s scarcity ensures that its value is not eroded by excessive supply. This makes it an attractive option for individuals and institutions looking to preserve wealth over time.
As a hedge against inflation, cryptocurrencies offer an alternative to traditional assets when fiat currencies lose purchasing power. In countries experiencing high inflation, people turn to Bitcoin and stablecoins to protect their savings from devaluation. Since crypto operates outside the control of governments and central banks, it provides financial security in regions where economic instability threatens traditional banking systems.
Moreover, global investors use Bitcoin as a diversification tool in their portfolios. While crypto markets are volatile, the long-term adoption and increasing institutional interest suggest that cryptocurrencies could play a growing role in wealth preservation and financial stability.
DeFi (decentralized finance) and NFTs
Decentralized Finance (DeFi) is a rapidly growing sector that aims to recreate traditional financial systems (like lending and borrowing) on the blockchain. Non-fungible tokens (NFTs) are unique digital assets that represent ownership of items like art, music, and virtual real estate.
Risks & security in crypto
Let’s discuss the risks and security considerations associated with cryptocurrency.
Volatility and market risks
Cryptocurrencies are known for their price volatility. Prices can swing dramatically in a short period, making them a high-risk investment.
Security threats
Cryptocurrencies are also vulnerable to security threats like hacks, scams, and phishing attacks. To protect your assets, it’s essential to use secure wallets like the Tangem hardware crypto wallet, which stores your private keys offline, making them less vulnerable to online threats.
Best practices for safe crypto transactions
- Use hardware wallets for long-term storage.
- Enable two-factor authentication (2FA) on your accounts.
- Be cautious of phishing scams and only use trusted platforms.
- Avoid using public Wi-Fi when making crypto transactions.
- Never reveal your private key or seed phrase to anyone.
The future of cryptocurrency
As cryptocurrencies gain mainstream adoption, governments around the world are developing regulations to ensure consumer protection and prevent illegal activities. These regulations could shape the future of the crypto industry.
Institutional adoption
Institutional investors are increasingly entering the crypto space, bringing with them significant capital and legitimacy. This trend is likely to continue as more companies and financial institutions recognize the potential of blockchain technology.
Conclusion
Cryptocurrency and blockchain technology are reshaping the way we interact with mainstream financial systems. From decentralized transactions to smart contracts and DeFi, the possibilities are endless. Understanding how crypto works is the first step toward navigating this exciting new world. As the industry continues to evolve, staying informed and adopting best security practices will be key to making the most of what cryptocurrency has to offer.
Meta Title: How Does Crypto Work? A Beginner’s Guide to Blockchain & Digital Currencies
Meta Description: Discover how cryptocurrency works, from blockchain technology to wallets and transactions. Learn about mining, staking, and the future of digital currencies.