Bitcoin Technology

Blockchain Technology Explained: The Backbone to Cryptocurrency

Blockchain Technology: The Backbone to Cryptocurrency

Before I explain Blockchain technology, let us celebrate! Bitcoin just hit its 10,000$ mark, and its safe to say everyone has heard of it and cryptocurrency by now. Well, even if you haven’t, the following definition will set you straight.

Cryptocurrency is a form of digital money that facilitates highly secure transactions using cryptography. It is currency that is available online and is not tangible, and is secured through cryptographic encryption. Hence the name, cryptocurrency. It operates without the supervision of a central bank. The encryption techniques it works on are used to verify the generation as well as transfer of funds.

The first cryptocurrency, i.e. Bitcoin, came into the picture in 2009. With more than a 100 other options available, Bitcoin is still the most popular one out there. It started at the pathetic price of 0.0015$, and rose, in just 8 years, to a majestic 10,000$!! To know how this value explosion occurred, read: Bitcoin Price: The Past, Present, and the Future!

In order to better understand cryptocurrencies, let’s dive into the comparison of paper money and Bitcoin.

Bitcoin is a currency that can be used to make transactions online. However, normal currencies like Euro and Dollar can also do the same. So, where does the difference lie?

  • It lies in the fact that Bitcoin is decentralized. In the United States, the Federal Reserve System acts as the central banking system. 14 member countries making use of the Euro lie under the purview of the European Central Bank. On the contrary, Bitcoin is not managed by a single central entity.
  • Setting up an account on Bitcoin is a matter of seconds. The same isn’t true for setting up bank accounts dealing with normal currencies. The latter requires submitting detailed paperwork and usually takes a lot longer.
  • Information tracking isn’t any less efficient in terms of Bitcoin. Bitcoin stores all transactions in a ledger called Blockchain, which is the topic of this article.
  • International payments are not charged extra sums when they are made with Bitcoin. Free international transfers facilitated by Bitcoin happen in a flash.

So, what is Blockchain Technology?

Blockchain is yet another term that is constantly stirring up discussions in technology as well as business oriented circles. Analysts believe it to be the next big thing meant to revolutionize financial services around the globe. It’s so powerful, simple and effective, that traditional banks are considering implementing Blockchain technology over the regular ledger. But, what is Blockchain technology?

In simple terms, it is a digital ledger that publicly displays all the transactions made in Bitcoin as well as other cryptocurrencies. Every monetary activity is recorded and stored as a block, and a chain of these blocks represent the entire transaction from start to finish. Hence the name, Blockchain. More precisely, Blockchain is a technological advancement that makes use of mathematical operations, cryptography, and distributed databases to keep track of transactions. The digital ledger that is formed as a result isn’t tied to central node. The data is distributed across servers (hence decentralized and safe from attacks), and cannot be tampered with (hence authentic).

Just like Wikipedia pages are not controlled by a single person, Blockchain does not extend excessive power to a single entity. This relinquishment of power is what makes Blockchain technology genius.

Blockchain technology
A Chain of Blocks

Source: https://en.wikipedia.org/wiki/Blockchain#/media/File:Blockchain.svg

How Blockchain Technology Trumps Traditional Ledgers Used in Modern Day Banking

A single bank’s database has to operate within the bank’s network. Therefore, the processing capabilities are limited to the number of devices on the bank’s specific network. This also makes all the data central, and vulnerable to hacks and single point failures.

With networking capabilities extending to a plethora of machines across the world, the processing power of Blockchain is monumentally higher than that of traditional banking database systems. Furthermore, decentralization ensures that a single point of failure never takes down the whole mechanism.

Bitcoin was the the first cryptocurrency to implement the Blockchain based secure database model in 2009. Consequently, it became the first digital currency to find a plausible solution to the problem of double spending. The same was made possible only because cryptocurrencies are decentralized.

In fact, banks are currently aiming to formulate Blockchain technology models for their databases. Big names like IBM and Infosys have already succeeded in implementing Blockchain solutions for banks.

Blockchain technology

Source: https://www.pwc.com/us/en/financial-services/fintech/bitcoin-blockchain-cryptocurrency.html

The Origin of Blockchain

No one is quite sure who invented Blockchain technology. The first mention of the term came in the form of a white paper on Blockchain technology that was released in 2009; the same year Bitcoin came into existence.

At that time, Blockchain was introduced as an essential component of Bitcoin.

The white paper mentioned an alias, ‘Satoshi Nakamoto’, which was also the pseudonym of Bitcoin’s inventors. But, the real person/group of persons responsible for the creation were not revealed. The situation has changed now. An Australian entrepreneur, Craig Steven Wright identified himself as the original creator of Blockchain. However, the claim is not completely trusted by the online community.

What Makes Blockchain More Secure Than Traditional Databases?

Yet again, the answer lies in the decentralization of Blockchain. Since there is no central organization powerful enough to validate transactions, tampering with the records becomes all the more difficult.

The smallest part of a Blockchain, i.e. a block, is auto generated digitally when a transaction occurs. This block can only be entered to the digital ledger if it is validated by a specific percentage of computers within the network. To be exact, 51% of computers on the Blockchain need to verify the addition of a block.

However, if the said majority doesn’t approve of the transaction, the proposed block is not added to the existing chain. This essentially means the data in every chain is authentic and accurate.

How Blockchain Works

In order to understand the basis of Blockchain technology as a whole, let’s take the example of its implementation in Bitcoin.

The publicly displayed ledger showcases all records of Bitcoin transactions, but you can only access the blocks you own. Access is provided if you are in the possession of a private key. Therefore, whenever you make a transaction in Bitcoin, the private key is transferred as well. Hereby, access to that chunk of bitcoins is completely transferred to the new owner.

Blockchain based transactions require authentication as well as authorization. The private keys enable the chain to make note of the cryptographic identity. The transaction’s pending approval by a specific set of computers on the network takes care of providing authorization to the given transaction. Simply put, Blockchain ask the users the following questions:-

  • Who are you?
  • Do you have the means to do what you’re trying to do?
Blockchain technology
How Blockchain Technology Works

Source: https://www.pwc.com/us/en/financial-services/research-institute/blockchain.html

The Future of Blockchain Technology

By the year 2024, the Blockchain market is expected to have a net worth of $20 Billion. In the current year itself, the average investments in Blockchain technology have been around $1 Million. The percentage of North American as well as European banks identified to be experimenting with Blockchain have been accounted to be 90%.

Needless to say, Blockchain is like the car that everyone (at least related, even remotely, to finance) wants to drive!

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