Cryptocurrencies: Technology Demystified


Cryptocurrency Technology Demystified – While this is an established fact that the mainstream users and newcomers to the cryptocurrency business do not care much about the working of the currency, it is imperative that we understand the basic working methodology underlying prominent cryptocurrencies so as to safeguard ourselves from the speculative bubbles building around some.

Cryptocurrencies are physical precompiled files that use a public key (easily available) / private key (unique to a user) pair generated around a specific encryption algorithm. The key establishes ownership of each key pair, or ‘coin,’ to the person who is in possession of the private key. These key pairs are stored in a file named ‘wallet.dat,’ that resides in a default hidden directory on the owner’s hard drive. The private keys are sent to counter party involved in the transaction through dynamic wallet addresses generated by the user. The destination payment address usually is the public key of the currency key pair. There is a limited amount of each type of cryptocoin available on the network, and value of each unit is assigned based purely on a couple of factors. First the supply and demand and second the fluctuating difficulty/constraint levels required for mining each coin.

It goes without saying that the wallet.dat file is the most important file of the cryptocurrency software architecture, as that is where the physical cryptographic private key file is stored analogous to cash. If a user loses their wallet.dat file, or has it stolen, the cryptocurrency is lost.


To the rescue of the common user, the decentralized nature of open source protocol ensures that the control of the network remains in the fists of the user. Transactions are dependent solely on participants in the network, and the user being responsible for the security of their own finances and data, thus negating the need for reliance on third parties such as banking institutions.

For example, the Bitcoin operates much like a p2p file sharing protocol, and similar to the torrent technology. The essence being, a p2p network relies on user participation for successful trusted data exchange. Each transaction is confirmed through key verification on multiple nodes in the network before reaching its destination.

Market Participants 

Talking about the market, with no regulators or monitory bodies in place, the exchange trading platforms such as BTC-e and Vircurex are essentially the backbones of the cryptocurrency economy. These trading platforms provide the place for miners and speculators to engage primarily in arbitrage among various cryptocurrencies.

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To contact the writer of this article: Yashu Gola at