The Technology Behind CryptocurrencyWritten by Amber Alvi
There is no doubt that Blockchain technology is one of the most-hyped innovations of this century. Created to support bitcoin, Blockchain now powers thousands of cryptocurrencies. Thanks to its many benefits, today’s developers are developing ways to integrate this technology into businesses, such as finance, art, and medicine.
This guide will discover how blockchain works, the different types of blockchain, and what makes it different from other internet technologies.
What is Blockchain?
A blockchain refers to a public digital ledger of transactions that a network of computers maintains to protect it from hackers or intruders. The robust technology provides a safe and secure way for users to deal directly with one another. There is no intermediary like a bank, government, or any third party.
The concept first emerged in 1982, when a dissertation discussed the design of a distributed computer system that can be trusted, created, and maintained by mutually suspicious groups. However, a paper by the pseudonymous Satoshi Nakamoto brought an academic theory into real-world use in 2008. The report was called Bitcoin: A Peer-to-Peer Electronic Cash System.
The blockchain/bitcoin architecture launched in 2008, built on concepts and technologies from the previous three decades. The design from Nakamoto also launched the ‘concept of a chain of blocks,’ which made it possible to add blocks without the need for a signature from a trusted third party.
According to Nakamoto, an electronic coin is a chain of digital signatures, where every owner transfers the coin to the next owner.
The expanding list of blocks or records is connected through cryptography. Every transaction is verified independently by peer-to-peer computer networks. All transactions are time-stamped and added to an ongoing chain of data. The best part is that nobody can alter this data once it is recorded.
This technology is already popular with the growing use of Ethereum, Bitcoin, and other cryptocurrencies. Blockchain has promising applications for property sales, medical records, and legal contracts. Any industry that needs to authorize and record legal agreements can benefit from a series of actions or transactions.
How does it Work?
Blockchain is also called distributed ledger technology. First, let’s delve into the mechanics of blockchain, considering the example of Bitcoin.
The sale and purchase of bitcoin are entered and transmitted to a system of powerful computers or nodes. This network comprises thousands of nodes around the world that contend to confirm the transaction via computer algorithms. The process is called bitcoin mining.
The miner who first completes a new block gets bitcoin as a reward. This reward is a combination of network fees and newly minted bitcoin, passed on to the seller and buyer. The fee depends on the volume of transactions.
The sale gets added to a block on the distributed ledger once the purchase is cryptographically confirmed. Most of the network must then verify the sale. Finally, the block is connected to all previous blocks of bitcoin transactions permanently through a hash or cryptographic fingerprint, and the deal is processed.
Types of Blockchains
These types of blockchains are decentralized and open networks of computers. All users can access public blockchains since they are accessible to users who want to validate or request a transaction. Miners who validate transactions get rewards. Public blockchains utilize proof-of-stake and proof-of-work. ETH or Ethereum and Bitcoin are two common examples of public blockchains.
As the name suggests, these types of blockchains are not open to everyone. Due to access restrictions, anyone who wants to join them needs permission from the system administrator. Typically, a single entity governs private blockchains, which means they are centralized. Hyperledger is an example of a permissioned and private blockchain.
These blockchains are a mix of private and public blockchains and contain decentralized and centralized features —for instance, R3, Dragonchain, and Energy Web Foundation.
A blockchain that runs parallel to the main chain is called a sidechain. It allows users to relocate digital assets between two separate blockchains and enhances efficiency and scalability. The Liquid Network is an example of a sidechain.
Benefits Of Blockchain
Before we learn more about blockchain and its pros and cons, let's delve into some of blockchain's most important benefits.
Blockchain is more secure than any other record-keeping system. That’s because the shared documentation of transactions can only change with consensus on a blockchain network. Thus, the information can be modified only if most nodes or everyone agrees to update a record.
In addition, once a transaction approves, it encrypts and connects with the previous transaction. Since blockchain is decentralized, nobody has the right to modify records. For that reason, industries that need to protect sensitive data can benefit from this technology to enforce security—for example, healthcare institutions, public governments, and financial services.
Blockchain guarantees transparent transaction histories since it is a distributed ledger where all the network nodes share a copy of the documentation. Therefore, everyone can easily access and view the data on a blockchain ledger. Furthermore, in case someone modifies the history, the entire network can view the changes. Hence, all data related to currency exchange is accessible to everyone.
With conventional paperwork, finalizing a transaction takes quite some time because it needs third-party mediation. Besides, the process can also involve human errors. Blockchain streamlines and disciplines these methods and reduces the risk of mistakes. As a result, trading is faster and more efficient. In addition, parties don’t need to maintain multiple documents because there is only one ledger.
There is less clutter, and everyone can access the same information, thereby establishing trust. Settlements are effortless and smooth, without any intermediaries.
Since blockchain does not involve any middlemen or third parties, businesses can save high costs. You don’t have to partner with anyone because you can trust the trading partner for setting the policies and rules of exchange. The effort and expense that goes into documentation and its revisions are also saved because everyone can access a single unchangeable version of the ledger.
We all know that it is difficult to trace products to their origins in a complex supply chain. However, blockchain makes traceability easier than ever before. This is because the exchanges of goods are recorded, and you can get an audit trail for knowing the origin of a particular asset. Another great thing about blockchain is that this level of product traceability can help prevent fraud.
Since each transaction is recorded during its complete journey in blockchain, an audit trail exists for everyone to view and verify the authenticity of their assets.
Pros of Blockchain Technology
We are using bitcoin as an example to offer some pros and cons of blockchain technology.
No government agency controls or issues bitcoin or any other cryptocurrency. That also implies that there is no chance of any agency or government to decide the fate of a public blockchain. The absence of intermediaries cuts down on high costs because there is no fee to pay for third-party transactions. Furthermore, unlike banks or other intermediaries, blockchain is available for business 24/7 and 365 days a year.
Anonymity and Transparency
All transactions on the Bitcoin blockchain are recorded on the network computers. Therefore, the transaction history and address of bitcoin wallets holding the cryptocurrency are entirely transparent. However, the owners of each wallet connected to the public addresses stay unrecorded and anonymous.
Security and Accuracy
The transaction requires little human interaction, which means there are fewer chances of errors.
Every transaction must be confirmed by most network nodes, which makes it more complicated to manipulate or modify information. That means nobody can spend a bitcoin more than once.
Multiple Applications of Blockchain Beyond Cryptocurrencies
The applications of blockchain extend beyond digital currencies. Even though cryptocurrencies like bitcoin are on a public blockchain, several business applications are created on private blockchain networks. Here are a few of these applications.
Medical records: According to Deloitte Consulting, a nationwide blockchain network for electronic medical records can support better health outcomes for patients.
Blockchain Supply Chain: IBM Blockchain technology provides private network solutions to track the product supply chain accurately. Hence, companies can benefit from blockchain to find out where recalled products have been sold and shipped.
Smart Contracts: Using blockchain, contract terms can automatically be updated or changed as per a predetermined set of conditions.
Digital Elections: Developers are trying to work on blockchain for applying the technology to elections.
Property transactions: We can apply blockchain to a wide range of asset sales, such as investment or real estate portfolios.
Cons of Blockchain Technology
Scams and Frauds
Like any new technology, many of the first adopters of this technology were criminal enterprises. Criminals used popular cryptocurrencies like bitcoin as a mode of payment because of the privacy it offers and for targeting bitcoin holders for scams.
For instance, Silk Road, a famous black market online shopping network dealing with illegal drugs and unlawful services, consumed bitcoin. As a result, the company was shut down in 2013 by the FBI.
At the same time, bitcoin investment scams continue to skyrocket. As per the Federal Trade Commission, around 7,000 who fell victim to cryptocurrency scams lost $80 million between October 2020 and March 2021. That makes it almost a 1,000% increase in reported losses year on year.
The reputation of cryptocurrency boomed in 2021 when Bitcoin attained a record spot price of approximately $65,000. However, the increased price soon dropped to nearly 50% because of its inherent volatility in June.
Impact of Bitcoin on the Environment
Bitcoin mining involves a network of high-speed computers which means there is a significant consumption of energy. It is interesting to note that if Bitcoin were a country, it would be the 34th biggest electricity consumer, ahead of the Philippines and behind the Netherlands.
Bitcoin utilizes a whopping 707 kWh of electricity for each transaction. That is 11 times as much as Ethereum. According to Elon Musk, the CEO of Tesla, his company would not accept bitcoin until the cryptocurrency reduces its carbon footprint. For that reason, blockchain developers are now brainstorming less-energy-consuming options.
The Bitcoin blockchain processes around seven new transactions per second. But as per Visa, the credit card giant, the company can successfully process 24,000 transactions in one second. This situation presents a scalability problem for the Bitcoin system.
The good news is that other forms of blockchain-based cryptocurrency are trying to resolve this issue. For example, the much-anticipated upgrade of the Ethereum system or Ethereum 2.0 will likely handle 10,000 transactions per second. That will be quite an improvement from its current rate of 30 transactions per second.
The Future of Blockchain Technology
Although the Bitcoin system is the most well-known application of blockchain technology, thousands of other cryptocurrencies are emerging thanks to this innovative technology. The future will unfold how Bitcoin will replace different modes of conventional payment methods. But looking at the current developments in the blockchain realm, we are sure to witness extraordinary changes across industries.
What is Blockchain?
Blockchain is more than a database. This technology is now revolutionizing how we exchange information and value across the internet, eliminating the ‘gatekeepers’ from the process.
Who Invented Blockchain?
David Chaum, a cryptographer and an American computer scientist proposed the first blockchain-like protocol in 1982. W. Scott Stornetta and Stuart Haber published their work on Consortiums later in 1991.
However, Satoshi Nakamoto, a pseudonym for a group of people or individuals, invented the first blockchain network and deployed Bitcoin, the world's first digital currency, in 2009.
Can you Transfer Money from Blockchain to a Bank Account?
No. That’s because blockchain is a type of technology and not money. However, you can transfer cryptocurrencies to a bank account, depending on, whether the bank accepts cryptocurrencies or not.
When did the First Bitcoin Transaction?
In 2009, Satoshi Nakamoto sent ten bitcoins to Hal Finney, who developed the first reusable proof-of-work system in 2004.
About The Author
Amber is a seasoned content marketer who is enthusiastic about technology, web design, mobile apps, and everything digital. With over 15 years of experience in the content creation business, Amber loves exploring ideas from different niches, especially technology and online marketing.