How Does Cryptocurrency Work? Discover the Technology Behind Bitcoin and Beyond
Cryptocurrency is one of those things that can seem more complicated the more explanation you hear. Sure, a digital alternative to money makes a little sense. Then you start learning about the inner workings of the blockchain, the world of decentralized finance, and the code required to move a token from one wallet to another, and it can start to feel like a subject you need a degree to wrap your head around.
Knowing how cryptocurrency works is the first step to using it, and the potential is real: it can be a lucrative investment (or a risky one, which we'll discuss), an efficient way to move money around the globe, or used as an alternative to dollars or assets like gold or real estate. This guide covers crypto in detail without getting too technical, so you can come away with a working knowledge of how the technology and the market actually work.
You'll also find that cryptocurrency is not the easiest thing to get into. If you're looking for a financial provider that gives you the payment power of crypto without needing a computer science degree to be sure you're doing it right, consider Slash.¹ Slash lets businesses send and receive USDC and USDT across 15 major blockchains, with no wallets or private keys to manage, so you can utilize the speed and low costs of crypto without the complexity.⁴
What is Cryptocurrency?
Cryptocurrency is a broad term that refers to forms of digital currency in which transactions are verified and records maintained by a decentralized system; the name traces to the term cryptography, the process of scrambling data. The definition on its own is a little technical, so let's break down what it all means.
Start with regular money in a bank account. It's widely known that banks do not keep all of their held assets liquid in a vault; banks lend out money to borrowers, and instead keep a smaller portion of funds on hand. So, the number in your bank account really is just a number in a database, and the bank has ownership over how and when you can access your money. The arrangement works, but there are some tradeoffs: fees for transfers, correspondent banking networks, cut-off times, and settlement delays.
Cryptocurrency was built to work outside the banking system, using the blockchain to enforce the safeguards a transaction needs to happen in code. Instead of one institution holding a master record, thousands of computers worldwide keep identical copies of the same ledger and follow shared rules for deciding which transactions are valid. Every token is like a cipher that only the sending and receiving computer understands, and the blockchain is the only system that can decipher it.
Cryptocurrency is not just one thing. It’s an entire class of digital assets, including:
- Payment coins: Exchange-traded assets designed to send and store decentralized value. This includes Bitcoin, Litecoin, and others. Most treat Bitcoin as an investment rather than a way to pay for things.
- Stablecoins: Tokens designed to hold a steady value, almost always one U.S. dollar, backed by reserves of cash and short-term government debt. USDC and USDT are the largest. Because the price does not swing, these are most commonly used for payments, not investment.
- Utility and exchange tokens: Tokens that do something specific inside one platform, such as paying discounted trading fees or granting access to a service tier.
- Governance tokens: Tokens that work like voting shares in a project, letting holders vote on changes to how that project operates. These are important in decentralized finance (DeFi), which is the system behind lending, insurance, and more on the blockchain.
- Meme coins and NFTs: Digital assets with no tangible value underneath them, priced almost entirely on attention.
- Tokenized real-world assets: Traditional investments such as precious metals, Treasury bills, or real estate, represented in value on a blockchain.
What is the Blockchain?
A blockchain is a shared digital ledger that records transactions in an order no single participant can alter. The name is literal. Transactions are grouped into blocks, each one a batch of transactions confirmed at roughly the same time, and every new block is linked to the one before it, forming a chain that runs back to the network's first block.
A common misconception is that the blockchain is just one system. The blockchain, in reality, refers to a certain type of system, but it has several different versions: Ethereum, for example, is foremost a blockchain designed for smart contracts; its accompanying token, ether (ETH), is simply named after the network itself.
The whole point of the blockchain is that it has the capabilities required to verify financial transactions without a central authority. It does that with two pieces of math: digital signatures, which prove a transaction was authorized by whoever holds the account's private key, and hashing, which produces a short fingerprint of each block of transactions so that any later edit to the record is detectable.
How Does the Blockchain Work?
Step 1: A transaction is created and signed
You start a payment from a wallet. A wallet does not hold money; it holds your keys and gives you an interface for using them, closer to a keyring. The wallet signs the transaction with your private key, which proves the instruction came from the account being debited without exposing the key itself.
Step 2: The transaction is broadcast to the network
The signed transaction goes out to the network's nodes, the independent computers running the blockchain's software and holding a full copy of the ledger. It waits in a queue of pending transactions alongside everyone else's. You attach a network fee at this stage, which is what motivates block producers to pick your transaction up sooner.
In Slash, this stage starts with an on-ramp. It's an industry-specific term that means converting cash into crypto: you pick the stablecoin and the blockchain you want to send on, and Slash converts the dollars and broadcasts the payment for you, so the transaction reaches the network without you ever handling a wallet.
Step 3: Nodes verify your transaction against the rules
Each node checks the transaction independently: that the signature matches the sending address, that the balance is there, and that those funds have not already been sent somewhere else. Anything that fails is dropped. No node has to trust any other node, because they all run the same checks on the same data.
Step 4: A block producer bundles it into a block
One participant gathers pending transactions into a block and proposes it to the network, a role called a miner on some blockchains and a validator on others. Which participant earns that right is decided by the network's consensus mechanism, the rule governing who gets to propose a block and what it would cost them to cheat.
Slash automatically generates a block ID and a block explorer link for each crypto payment. A block explorer is a public search tool for that blockchain's ledger, so you can watch your payment confirmation on the network you chose.
Step 5: The network confirms the block
Every other node checks the proposed block, and if it holds up, adds it to their copy of the chain and moves on to the next one. Bitcoin adds a block roughly every 10 minutes; Ethereum settles in about 12 seconds.
Step 6: The payment settles
Each additional block stacked on top makes reversal harder, because undoing your transaction would mean rebuilding every block after it faster than the rest of the network builds forward. After enough of those confirmations, the payment is treated as final.
In Slash, stablecoins arriving in your account run the same process in reverse, through an off-ramp that converts them back into dollars. Because Slash does not custody stablecoins, what lands in your account is a dollar balance rather than tokens, and there is no wallet to reconcile at the end of the month.
Proof of Stake vs Proof of Work
Adding a block to the chain is a job someone has to do; on a public blockchain, anyone can volunteer for it. Every network needs a way to pick which miner or validator gets the next block, and a reason for them not to cheat once they have it. Whoever writes the next page of the ledger could spend the same coin twice or leave out a payment they don't like, and with no bank in charge, nobody sits above them to catch it.
Proof of work and proof of stake are the two methods used to prevent bad actors from creating inaccuracies on the blockchain:
- Proof of work, used by Bitcoin, turns block-making into a lottery. To add a block, a computer has to find a number that, combined with the block's contents, produces a fingerprint the network will accept. There is no shortcut to finding it, so machines guess billions of times a second until one hits. The winner adds the block and earns new coins.
- Proof of stake, used by Ethereum and most newer networks, takes a deposit instead. Participants lock up coins for the right to add blocks, and the network takes those coins away if they break the rules.
Proof of work’s security is : attacking it means out-spending everyone else on hardware and power. The cost is heavy energy use and slower, pricier transactions. Proof of stake settles in seconds, costs far less to use, and consumes a fraction of the energy. The tradeoffs are that influence follows whoever owns the most coins, and it has been tested in the real world for far less time.
Uses for Cryptocurrency
Investing
Investing is by far the most common use for crypto. Investors buy either directly through an exchange, a platform that trades crypto for dollars, or through funds that hold the asset on their behalf so the investor never manages private keys. Bitcoin and Ethereum take the large majority of that money, while smaller tokens trade on the expectation that the project behind them grows. Unlike a stock, there are no earnings or dividends underneath the price, so returns depend entirely on what the next buyer will pay.
Payments
Businesses that use crypto for payments almost always use stablecoins, since the token is pegged to the dollar or another stable asset. That means the value of your payment won’t dramatically swing like it would if you were sending Bitcoin to someone, so you get access to the blockchain without huge exposure to.. The most compelling advantage is for international payments; instead of paying an outbound wire fee, a currency conversion spread, and waiting one to five business days before it lands with a wire, a stablecoin generally costs an on-ramp fee plus a small network fee and arrives within minutes.
Staking and Yield
Staking means locking up coins to help operate a network in exchange for newly issued coins, quoted as an annual percentage the way a savings rate is. Ethereum staking has recently paid in the low single digits, often around 2% to 3% a year. However, there are two caveats: rewards are paid in the same coin you locked up, so a 3% return means little if that coin falls 40%, and the money is not always available on demand, with waiting periods to withdraw and penalties if the validator acting on your behalf misbehaves or goes offline.
Holding Alternative Assets
Blockchains can also hold assets that have nothing to do with crypto. Tokenized gold, Treasury bills, money market funds, and real estate are all issued on-chain, giving an investor a familiar asset that settles in minutes, trades around the clock, and can be bought in fractions rather than whole units.
DeFi
DeFi covers lending, borrowing, and trading run by smart contracts, which are programs that hold the funds and enforce the terms of an agreement automatically. Lending shows the difference: a smart contract cannot check credit or sue, so it requires collateral worth more than the loan, and if that collateral falls close to the loan value, the program sells it automatically to repay itself, a forced sale called liquidation. The rules being visible in the code is the appeal, but code contains bugs, and an exploited program comes with no chargeback, no deposit insurance, and no customer service.
Send and Receive Stablecoins with Slash
Say a contractor in the Philippines invoices you at 4pm on a Friday. The wire could cost you $40 just on the platform fee; then, it hops through a correspondent bank or two and lands sometime Tuesday, minus whatever the banks took for processing along the way. Sent as USDC through Slash, that payment can arrive before you close your laptop at a fraction of the cost of a wire.
Slash is a business banking platform that natively supports stablecoin payments, including USDC and USDT, across 15 major blockchains, with low conversion fees between dollars and stablecoins that fall further with volume. And you aren't forced to keep crypto in its own corner of your finances: your business can use the same dashboard for your accounts, FDIC-insured up to $150M through partner bank Column N.A., along with multi-rail payments and corporate cards.²
With Slash, cryptocurrency can be just as accessible as your everyday finances. Here's what else you get when you open an account:
- Slash Visa Platinum Card: A corporate charge card that earns up to 2% cashback on eligible business spending. Set granular card controls, customizable limits, or team-specific groupings to better handle employee spending.
- Diverse payment methods: Slash supports a wide range of payments, including domestic and international ACH, wire transfers to over 180 countries via SWIFT, and real-time domestic payments through RTP and FedNow.
- High-yield treasury: Earn up to 3.83% annualized yield with money market funds from BlackRock and Morgan Stanley, managed directly within your Slash account.⁶
- AI-powered insights: Ask Twin, Slash's AI financial assistant, to analyze your finances for you, giving easy-to-understand explanations about your metrics. Make online purchases, freeze cards, and track spend from end-to-end with a simple prompt.
- Expense management: Streamline expense reporting with end-to-end SMS receipt collection for Slash cards, simple reimbursement flows, and automatic accounting updates.
- Working capital financing: Access short-term financing with flexible 30-, 60-, or 90-day repayment terms to help bridge cash flow gaps.⁵
Apply in less than 10 minutes today
Join the 10,000+ businesses already using Slash.
Frequently Asked Questions
What is the difference between a coin and a token?
A coin is the native asset of its own blockchain, like BTC on Bitcoin or ETH on Ethereum, and pays that network's fees. A token is issued on top of an existing blockchain, which is how most stablecoins are created, so sending one still requires the network's coin to cover fees.
How is cryptocurrency taxed?
Selling crypto, spending it, or trading one coin for another can each create a taxable gain or loss, since the IRS treats it as property rather than currency. Coins received as payment or as staking rewards count as income at their value that day.
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Can cryptocurrency be hacked?
The largest blockchains have never been broken at the protocol level, but the places people store and trade crypto are attacked constantly. Exchanges, wallets, and DeFi apps are the weak points, and because transactions cannot be reversed, stolen funds are rarely recovered.
Can a business accept cryptocurrency payments?
Yes, and most businesses that do use stablecoins so the amount received matches the invoice. Slash supports sending and receiving USDC and USDT alongside ACH, wire, RTP, and FedNow payments, with conversion back to dollars handled for you.
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