This is a HUGE topic, and this is where most people get bogged down, even some experts! Also, not all blockchain currencies work the same way - this is one of the reasons why there are so many different ones out there.
But, it is safe to say most of these coins work on blockchain technology. At a basic level, blockchains are just an organized list of records - the records are grouped into 'blocks'. For some perspective and a more thorough history, check out Wikipedia on Blockchain technology. The short version is that the blockchain concept was seemingly first published in the 90's by some experts in the US. In 2008, the original concept behind Bitcoin was published by Satoshi Nakamoto (his real name is unknown), and the first recorded Bitcoin block is dated in 2009.
What made Bitcoin different and interesting, was that it was a real-life implementation of blockchain technology that was DISTRIBUTED - meaning it was maintained and validated in a bunch of different places. If you ever used a peer-to-peer file-sharing service, these were also revolutionary for being distributed. Distributed systems like blockchain currencies contrast with traditional transaction systems like those run by banks - for example, if you have your money in the Bank of Antarctica, that bank controls the entire system, so anytime you spend money, move your money around, withdraw your money, or have your money stolen from you, the Bank of Antarctica is in charge of making all of that happen or fixing the problem. Realistically, if the Bank of Antarctica disappears, your money is gone. Distributed systems put these powers in the hands of many more people who are 'distributed' across the blockchain currencies network. We will get into the implications of this more later, but the distributed part is a very big deal.
Most cryptocurrencies can be ‘mined’ – meaning you can run a software program to ‘find’ additional coins that you then own (the reality of this is complicated… as you will see). For now, all you need to know about mining, is that mined coins are usually a reward for helping run the blockchain currencies' networks. Coin miners aren't so much 'discovering' coins as they are processing transactions for the blockchain currency network - then they are 'rewarded' with coins from time to time for their services. This whole concept is known as a Proof of Work system and was the other major new contribution from bitcoin when it debuted.
Note: Not all blockchain currencies require 'mining' - they don't use the Proof of Work system at all. There are other systems that blockchain currencies use to run their networks, like Proof of Stake. All of these details add up to why there are many different types of blockchain currencies out there.
To understand blockchain currencies better, we think it best to get to know the blockchain technology a little better.
Starting at the beginning, if you were to go about creating a payment system, one of the huge obstacles you must overcome is ensuring that nobody spends the same money more than once. It's actually a challenge! With a physical US dollar, it's simple because if you spend your one US dollar, it's gone, you literally don't have it anymore.
If you spend that US dollar with your debit card, it gets more complicated. Your bank and card company have complex systems in place to make sure you don't spend more than you have (more or less). For example, if I have $500 in my bank account, if it takes my bank a week to update their system showing how much money I have, I could buy thousands of dollars' worth of stuff in that week before the bank catches up, because according to their slow system, I still have $500.
With blockchain currencies, the blockchain system combined with how each currency manages that system prevents double spending from happening. With most of the big blockchain currencies, if you spend one coin somewhere, that transaction gets sent out to the network. There are many people working on the network (often 'miners') who will then 'verify' that transaction. Once enough different sources verify your transaction, it is considered officially validated and becomes part of the larger blockchain of transaction records. While the technical details get complicated, this is a simpler version of what happens. This all kind of begs the question too of: Why is this good? Why change?
As we have mentioned previously, blockchain currencies in general have several distinct advantages over traditional payment systems. One major one is control - as in, who controls the system? The short answer is that everyone who participates has some control. And the control is (mostly) distributed - as in no single person or organization controls the entire system. Whether this is an advantage to you or not goes into personal beliefs. For the most part, fans of blockchain currencies believe it is a HUGE plus that:
Everything has its disadvantages and its critics - what are they for blockchain currencies?
Like with many things in this world, blockchain currencies like Bitcoin have been abused by criminals, giving the whole blockchain currency world somewhat of a bad rap in some people's minds. With Bitcoin being pseudonymous (your funds aren't publicly tied to your name, just to a public address), enterprising criminals around the globe have found many ways to do bad stuff while remaining (somewhat) anonymous. Privacy, like many things, is clearly a double-edged sword.
Another big criticism involves the irreversibility of transactions on the blockchain of most blockchain currencies. This is intended to prevent 're-writing history', which can ten to be abused over time. But, it also means that if you spend your coins, it's a done deal, there is no getting them back. This leads critics to frequently comment on the lack of consumer protections with blockchain currencies like there are when using credit cards. If you get ripped off in a credit card transaction you can initiate a chargeback, there is no such thing with most blockchain currencies.
Also, blockchain currencies in general are relatively new. Being new, they are obviously not as proven in real-world use as the more traditional transaction and payment systems. This has been a major line from many critics of adopting blockchain currencies on a large scale. But, as time passes, many companies large and small are doing just that, especially with Ethereum & Bitcoin.
Want to learn more? Check out Part 3 of our Intro Series to dive even deeper into the world of blockchain currencies.