Cryptocurrency operates on the principles of blockchain technology, which is a decentralized digital ledger that records all transactions across a network of computers. Here’s a simplified explanation of how it works:

1. **Blockchain Technology**:

A blockchain is a chain of blocks, each containing a list of transactions. This technology ensures transparency and security as all participants in the network can view the transactions, but once recorded, the information in any given block cannot be altered retroactively without altering all subsequent blocks.

2. **Decentralization**:

Unlike traditional currencies controlled by central banks, cryptocurrencies are decentralized. This means no single entity has control over the entire network. Instead, the network operates on a peer-to-peer basis, with all transactions verified and recorded by participants known as nodes.

3. **Consensus Mechanisms**:

To validate and add transactions to the blockchain, cryptocurrencies use consensus mechanisms. The most common ones are Proof of Work (PoW) and Proof of Stake (PoS). PoW requires miners to solve complex mathematical problems to validate transactions, while PoS selects validators based on the number of coins they hold and are willing to "stake" as collateral.

4. **Cryptography**:

Cryptocurrencies use cryptographic techniques to secure transactions and control the creation of new units. Public and private keys are essential components. A public key serves as an address for receiving funds, while a private key is used to sign transactions and access the funds.

5. **Transactions**:

When a cryptocurrency transaction is initiated, it is broadcast to the network and included in a block. Miners or validators confirm the transaction's legitimacy and add the block to the blockchain. This process ensures that the same coin isn't spent twice and maintains the integrity of the system.

6. **Wallets**:

Cryptocurrency wallets store and manage digital assets. They come in two main types: software-based (online or mobile) and hardware-based (physical devices).