Understanding Blockchain and Cryptocurrency
There has been so much noise these days about Bitcoin, the blockchain, and cryptocurrency. Whether a rumor or a fact all of us must have heard something fascinating from all these noises. We are all bewildered with questions like- What is blockchain? How does blockchain technology work? How is it used in cryptocurrency? And many more…
This article is a brief guide to know about all such things and what’s in there for all of us. So let’s start with the basics.
Cryptocurrency is basically a medium of exchange, like the US Dollar, but it is digital and uses encryption techniques to control the creation of momentary units and for transfer fund verification.
Bitcoin is the most widely known cryptocurrency till date. It is for bitcoin for which the blockchain technique was invented. The blockchain is the technology that enables the existence of cryptocurrency.
Understanding Blockchain –
Though blockchain is a pretty simple concept, things get complicated dive deep into the concept.
There are a few simple ways in which we can understand the working of the blockchain.
In the language of cryptocurrency, a block is a record of a transaction. When a block is complete, it is added to the chain, creating a chain of blocks which is generally termed as blockchain.
Just imagine a virtual ledger. Each line is a transaction of bitcoins. IDs of sending and receiving wallets amount sent etc.
Just like the page number in a virtual ledger, in this case, the ID of each block is generated to include the ID of the previous block, which forms a chained system of IDs together.
The blockchain (ledger) has every single record of any bitcoin transaction that has ever taken place. This means with patience and software, every transaction for a specific wallet can be traced.
I believe that you might have developed a basic understanding of the blockchain. Now let’s look forward to knowing it’s functioning.
How Does Blockchain work?
When you own a cryptocurrency you are provided with a public key and a private key.
The private key (basically a long password) is the address in the blockchain, with the help of which you can withdraw money.But if that key is lost, there is no way of getting your money back.
A private key is the one that lets others send cryptocurrency to your account.
All the information on blockchain is publically available. It does not depend on a single computer or server to function, which means it is decentralized and every transaction is instantly visible to everyone.
The blockchain is just like a spreadsheet that is duplicated thousands of times across a network of computers.The network is designed such that the spreadsheet is now regularly updated. Here are some of the useful illustrations to understand the working of the blockchain.
Blockchain as a row of safes –
Imagine a huge number of safes lined up in a row. Each safe with a number on it, which depicts its unique identification and slots to drop money into it.The safe is transparent, so anyone can see how much money is there in any specific safe. Moreover, anybody can put their desired amount in any safe.
When you open a bitcoin account, you have a key to a new empty safe. This way you know the unique number of your safe. You can even share the unique identification of your safe if you wish others to drop money into it.
Blockchain as a public ledger –
If you transfer a cryptocurrency to someone or sell it, this information is visible to everyone on the blockchain.They may not know the exact ID of the person sending the money, but they will exactly know the amount of money that has been sent.
Thus blockchain is also visualized as an alternative to traditional banking. Blockchain can help eliminate the middleman, as it would not need any bank or other institution to verify the transaction.
Blockchain as the internet of value –
We can also call blockchain as the internet of value.Just as internet made data distribution free and online, blockchain does the same for money.
Blockchain as google docs –
Before google docs came into the picture, if someone wanted a collaboration on a piece of writing with some other person online, they had to create a Microsoft word document, send it to them, ask them to revise and edit as required.
The first person has to wait until the other is done with his work, saves the document and sent it back. Google doc fixed this as with its help multiple users can view and edit the document at the same time.
While most of the other database yet work like MS word: one person only can make changes at a time, blocking others until they are done.Blockchain helps instant updating the changes for everyone to see it.
Blockchain Features and Explanation –
Now as the idea of blockchain must be clear ( at least to some extent) let’s focus on some of its key features.
(1) Incorruptible –
The blockchain network functions such that it automatically checks in with itself after every ten minutes.
It is an ecosystem of a digital value that is self-auditing. It solves the problem of manipulation. So, we have one important conclusion from this which is mentioned below.
The data in blockchain cannot be corrupted because, if someone has to change any unit of information on the blockchain, it would mean to override the entire network, which requires a large amount of computing power which is very unlikely to happen in practical (while the idea may sound good in theory). Capturing bitcoin by controlling the system would also have the effect of destroying the value.
(2) A network of computing nodes –
To understand how blockchain is formed, we must understand what these so-called computing nodes are.
Nodes are basically the “administrators” of the blockchain and they voluntarily join the network(which makes the network decentralized) however, everyone has a chance to win bitcoin, as they join the network.
Nodes are said to be “mining” bitcoins, but it would not be enough accurate to call it so. In fact, everyone in the network is competing and trying to solve computation puzzles to win bitcoins. The blockchain is the key concept behind cryptocurrency, but there is various other potential application of this technology, which is recognized.
(3) Decentralisation –
The decentralized networks are the next huge wave in technology. Decentralisation is a peer to peer basis network operation.
For managing records of bitcoin transaction, a global network of computers uses blockchain technology. This means bitcoin is not managed by any single central authority, but by its network
(4) Enhanced security –
As the data is not held by a single authority and is distributed over the entire network, blockchain eliminates the risk that comes with centralized control. While most of the data online are vulnerable and can be exploited by computer hackers, the blockchain security methods use advanced encryption technology.
The basis of these is the private and the public keys. A private key is similar to a password that gives a person access to their bitcoin or other digital assets while a public key is a long string of numbers that is generated randomly and is basically the address of the user on the blockchain is incorruptible.
Now with this basic understanding the key features of the blockchain, we can easily understand the various business application in which it can constitute. few of them are mentioned below.
(a) Smart Control –
At current levels development of technology, smart controls can be programmed to perform a simple project. It will be coded such that it executes only when specialized conditions are met.
(b) Crowdfunding –
Some advanced works are done by certain crowdfunding initiatives like the kick starter for the emerging peer to peer economy. Blockchain can be very effective in taking this interest to a next level by creating crowdfunding ventures a capital fund.
(c) Governance –
The distributed database technology could bring full transparency to elections or any other poll by making the results publically accessible and fully transparent.
(d) File storage –
There are many benefits of decentralization file storage on the internet. The distributed database technology helps protect files from getting hacked or lost.
(e) KYC and AML –
Know your customers(KYC) and anti-money laundering has a strong potential to adapt the blockchain technology. Currently, institutes must have to perform a multi-step process for every new customer, which involves intensive labor work. KYC cost could be reduced through cross-institutional client verification and at the same time makes the monitoring more effective.
(f) Data Management –
Today people have to exchange their personal data in order to use social media platforms like Facebook for free. In future, a user can manage or sell the data that their online activity generates. As bitcoin or some other cryptocurrency can be distributed in small fractions, it might turn out to be the currency used for such kind of transactions.
Hope this blog post might have answered your question “What is blockchain and cryptocurrency?” and developed your deep understanding of blockchain and cryptocurrency. There are many technical terms in my next post I will explain about Bitcoin and few other fields in which the blockchain technology is used.