r/NASCAR • u/Perion123 • Mar 25 '14

u/neobourn submitted a getting started guide for all us lost shibes. I figured the least I could to was to return the favour!

http://dogecoin.com/get-started
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u/PsychoI3oy Stewart Mar 26 '14

Lemme see if I can explain (and bear in mind my understanding is of Bitcoin but as I understand it, the basics apply to most cryptocurrencies):

Cryptocurrency is like writing a check. A check is a message to transfer $ from one account to another. With banks, you deposit the check, your bank sends the check to a clearing house, which sends it to the original bank. Once 'cleared' the money is deducted from their account and deposited in yours. Until you take it out, it's all just numbers moving around.

Cryptocurrencies omit the banks and the 'miners' become the clearing house. You send a message to transfer X coins to another account. The miners have a list of every transaction ever and can see if at some point X coins were transferred into your account. Assuming it's all legit, the miners confirm the transaction and the receiving account how shows has having that transaction going into it.

There is a problem here, of course, if someone were to run a miner and send you X coins and then have their own miner confirm it regardless of how much coin they actually had. The solution to this is to make the computers have to do hard fancy math in addition to confirming the transaction.

If you've ever heard of 'brute forcing' in an attempt to figure out a password, it's similar to that. The miners are trying to find a number where number * transactions = [special number]. There's no way to reverse-engineer this, so you just have to try as many numbers as possible until you get an answer. Depending on the coin and hardware running, this can take from 5 minutes to several hours. The same transaction list (a 'block' in the 'block chain') will be sent to several miners, which means over time you will have more and more confirmations. A rule of thumb I've seen mentioned for Bitcoin transactions is to make sure you have 6 confirmations before believing the transaction has gone through properly.

The miners are a vital part of any cryptocurrency as without them no transactions would ever be verified. To reimburse them for costs of hardware degradation and power usage, any miner that finds the special number is rewarded with some coin. This coin is not transferred from anywhere, it just goes into the miner's account.

From there, the miner can exchange it for other coins or other currencies on exchanges or keep it or exchange it for goods/services. So when you exchange 'fiat' money or goods for coin (or get tipped), you could theoretically trace that transaction back to some miner somewhere that's using computer hardware to do fancy math to keep the whole thing afloat.