Cryptocurrency refers to a currency in digital or virtual form that uses cryptographic technology to add a layer of security for the transfer process and record keeping. Because of this feature, a digital currency can be difficult to fake. Being organic is a significant trait of cryptocurrency, and it is also regarded as the best feature. Again, no single body governs cryptocurrency, so the government or the banking industry cannot manipulate it. Bitcoin is an example of cryptocurrency that uses the blockchain technology. In this article, you will learn all about the blockchain technology, Bitcoin protocol and cryptocurrencies.
- 1 What is a Blockchain?
- 2 Blockchain as a Distributed Ledger
- 3 The Transparency of Blockchain
- 4 Blocks
- 5 Bitcoin Nodes vs. Miners
- 6 Decentralized Network
- 7 Who can Use the Blockchain Technology?
- 8 Crypto Technology
- 9 New Functionality Layer
- 10 Understanding the Bitcoin Protocol
- 11 Conclusion
- 12 Recommended Business and Entrepreneurship Books
- 13 Subscribe to Our Blog Newsletters (Enter your email address)
What is a Blockchain?
A blockchain is a decentralized and distributed digital ledger that is used to record transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network. More on this later.
By letting virtual information to be distributed but not replicated, blockchain technology has established a backbone on the evolution of the Internet. Originally created for the Bitcoin ecosystem, the technological world is now discovering other possible uses for the technology. In essence, blockchain can also create other forms of digital value.
There is no need to fully understand how the mechanism of blockchain operates in order to use it. But becoming aware of this technology will allow you to understand why this will become a significant part of our future.
Blockchain as a Distributed Ledger
Blockchain refers to the public, decentralized, and virtual record of all transactions of a cryptocurrency such as Bitcoin. The most recent transactions are recorded then added in chronological sequence. It also allows market players to monitor Bitcoin transactions without the need to access a central record. Every computer that is connected to the network will receive a copy of the blockchain that is automatically downloaded.
Imagine a ledger that is replicated several hundreds of times across a computer network. Then picture that this network is created for regular updates, and you now have the essential understanding of the blockchain technology.
The information that is recorded on a blockchain will exist as a public and regularly reconciled database. This is a method of utilizing the network, which has clear advantages. The blockchain ledger is not stored in one location, so the records are public and can be verified by anyone. No central format of this data exists for a thief to steal or a hacker to compromise. The data on the blockchain can be accessed by anyone via the Internet because it is hosted by millions of computers around the world at the same time.
If you are familiar with Google Docs, then it will be easy for you to understand this concept. The conventional method of sharing documents with collaboration is to send a document to another person, and ask them to do some revisions. The issue with this method is that you must wait until that person sends the revised copy again before you can access the changes.
This is the current method in our databases today. Two users cannot mess with the same document at the same time. This is how a majority of the banks now control, transfer, and maintain money balances. They momentarily lock the access while they are making a transfer, then wait for the other side to update the record, then will re-access the record once again for update. If you use Google Docs, both users can have access to the same document in real time. This is similar to a public ledger, but this is a shared record. The distributed part will come into play if sharing involves several people.
Like the Internet, blockchain has its own robustness. By keeping blocks of data which are identical across the network, the blockchain has no single failure point, and it cannot be regulated by a central authority.
Since the creation of Bitcoin in 2008, the blockchain technology has continued running without any major interference. Problems linked with Bitcoin are mainly due to mismanagement or cyber-attacks. To put it simply, these problems are caused by bad faith or human error and not by the underlying framework.
The Transparency of Blockchain
The blockchain network resides in a consensus world of collective wisdom which runs automatic checks and balances every 10 minutes. A self-checking ecosystem of virtual value, the network can reconcile each transaction that occurs in 10-minute intervals. Every group of these transactions is called a block.
There are two significant properties that could result from this:
- It is not corruptible, because changing any data on the blockchain will require a large amount of computing power in order to override the whole network.
- Data transparency is embedded inside the network as a whole, and so in essence, it is accessible to the public.
This is theoretically possible, but in practical terms, it is not likely to happen. For instance, taking control of the system in order to catch Bitcoins will also have the same effect of damaging value.
Blockchain is composed of blocks which are its basic units. The block is a collection of data containing related information and records about a transaction on the Bitcoin network.
Bitcoin Nodes vs. Miners
Bitcoin nodes constitute the peer-to-peer architecture that keeps the Bitcoin network running. A full bitcoin node fully validates transactions and blocks. It also helps the network to accept transactions and blocks from other full nodes, as well as validate transactions and blocks, and relay them to other nodes.
Most Bitcoin users describe nodes as the miners of Bitcoin, but this is actually not true in the strictest sense of the word. Anyone with a storage device that has enough space and is connected to the internet can run a node. Not all nodes mine Bitcoin. All miners are nodes but not all nodes are miners. Every full node has a complete copy of the blockchain and is able to verify all Bitcoin transactions.
A miner creates blocks in the blockchain which the nodes verify before adding it to the blockchain network. Basically, the miner works on transactions by coming up with the best combination (hash) to store that information. Only the first successful miner of a particular block is rewarded with bitcoin.
The Bitcoin protocol is designed to ensure that new blocks are created and confirmed approximately every ten minutes. The Bitcoin network is unique because it is a distributed network of people and machines working together by using principles of distributed governance.
In summary, Bitcoin nodes help to enforce the rules of the Bitcoin protocol. While Bitcoin miners process transactions and add them into blocks. These blocks are confirmed by Bitcoin nodes.
The blockchain network is a decentralized system. Anything that could happen on it is a work of the whole network. Several crucial impacts could result from this. In creating a new method of verifying transactions, some areas of conventional commerce may soon fade away. For example, stock market trading might become simultaneous in the blockchain, or it may make other forms of data recording such as land registry to become completely accessible to the public. Decentralization has been existing for many decades now.
A worldwide network of computers is now using the blockchain technology to simultaneously manage the database, which takes note of the Bitcoin transactions. Therefore, Bitcoin is managed by the system itself and not any single administrative organization. Through decentralization, the network can operate on a P2P basis.
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Who can Use the Blockchain Technology?
Take note that there is no need to comprehensively understand blockchain for you to use it and have it become beneficial for your life. At present, the financial world provides the most robust case for the technology. One example of this is global remittances. According to the World Bank, more than $500 Billion worth of transfers occurred around the world in 2015.
Currently, there is also a high demand for developers of the blockchain technology. It is now possible eliminate the need for a third party to process transactions. The general public was able to take advantage of personal computers with the introduction of Graphical User Interface or GUI that was launched through desktop computing. Likewise, the most typical GUIs created for the blockchain are known as the wallet apps that people can use to purchase things using Bitcoin and other digital currencies.
Online transactions are closely linked to the processes of verifying people’s identity. And of course, these wallet apps will continue to evolve in the years to come to include other forms of managing our identities.
By keeping data within the platform, blockchain is eliminating the risk, which comes with the data being stored in a central location. The whole platform has no central exposure points, which cyber thieves can easily attack. The World Wide Web has security problems with which we are all familiar. We usually depend on our password security to safeguard our assets and our identity online. On the other hand, the security layer of blockchain revolves around encryption.
This is all based on the concept of private and public keys. The public key refers to a randomly created number strings, which is actually the address of the user on the blockchain. The bitcoins sent across the whole network will be recorded and tagged to this address. On the other hand, the private key is similar to a password, which will provide you access to their Bitcoin or other virtual assets. As a result, the data you store in the blockchain cannot be corrupted. But while this is true, it is still crucial that you safeguard your digital assets by printing it out, which is regarded as a paper wallet.
New Functionality Layer
Through blockchain, the Internet gains a new functionality layer, which allow users to directly transact with each other. In 2016, Bitcoin transactions were worth around $200,000 daily. Through the extra layer of security added by the blockchain technology, emerging online businesses are on track to disrupt the conventional methods in the financial industry.
According to Goldman Sachs, the blockchain technology has the highest potential, specifically in improving the efficiency of settlements and clearing. This can also equate to a worldwide savings of up to $6 Billion every year.
Understanding the Bitcoin Protocol
Like email, Bitcoin is a protocol. Where email is a protocol for sending messages over the internet, Bitcoin is a protocol for sending money over the internet. The Bitcoin protocol defines the rules of a payment network that pays computers around the world for securing the network. The software that implements the Bitcoin protocol uses a special branch of mathematics called cryptography to ensure the security of every Bitcoin transaction.
The rules of the Bitcoin protocol include the requirement that a user cannot send the same bitcoin more than once and a user cannot send bitcoin from an address for which they do not possess the private key. If a user tries to create a transaction that breaks the rules of the Bitcoin protocol, it will automatically be rejected by the rest of the Bitcoin network.
1. Bitcoin Addresses
Understanding Bitcoin addresses is an important building block because a Bitcoin address is central to sending and receiving bitcoin and making sure that bitcoin is secured properly.
Bitcoin uses public key cryptography in order to create a Bitcoin address. Bitcoin addresses are stored in Bitcoin wallets. There are different kinds of wallets, and safe handling of Bitcoin wallets is really important. That is why it was discussed in this book as a full section.
The thing to understand about public key cryptography is that there is a public key, which is accessible and visible to everyone — in fact you share your public key with people in order for them to send you funds, or someone can use your public key to view transaction details on the public blockchain (like confirm funds in advance prior to engaging in a transaction). But there is also a private key, which only the owner of the Bitcoin wallet should possess and control. Without the private key, any assets stored on the Bitcoin blockchain are inaccessible.
2. Bitcoin Mining
The Bitcoin network is constantly maintained (and blocks of transactions are confirmed as accurate) by specially designed computer hardware known as mining rigs.
Bitcoin miners have a strong incentive to produce blocks that follow the rules of the Bitcoin protocol. If a Bitcoin miner produces a block that does not follow the rules of the Bitcoin protocol, then Bitcoin nodes will reject the block and the miner will lose out on their chance to win the block reward.
The sheer amount of computer power (known as the hash rate) needed to mine Bitcoin is controversial. For some, the use of electricity to run computer equipment to perform calculations to win the block reward seems like a mis-allocation of resources, especially given pressing issues such as global climate change.
But Bitcoin’s energy consumption creates a cost for running and managing the Bitcoin network. The cost of running the network helps reinforce the underlying value (as the price of bitcoin goes up, the cost of mining goes up, which makes the network more valuable). The energy inputs in a lot of ways mimic the production requirements of other extractive industries that use the investment of capital and energy to produce something that is valuable — such as the process of mining precious metals.
The high level of energy required to perform Bitcoin mining also helps keep the network secure. One threat to Bitcoin and other crypto networks is a 51 percent attack. A 51 percent attack occurs when a bad actor is able to capture more than half of the current mining power and essentially manipulate the underlying blockchain, potentially invalidating previous transactions or otherwise compromising the integrity of the ledger.
So Bitcoin mining, despite the controversy, is enormously valuable.
3. Consensus Algorithms
The two dominant consensus algorithms currently discussed in the cryptocurrency space are proof-of-work and proof-of-stake. A consensus algorithm is a foundational piece of how these permissionless and distributed systems work. Since there is no centralized gatekeeper or referee, there has to be an orderly standard by which the network can be confirmed and maintained.
Most of the popular cryptocurrencies (but not all, the currency XRP being one exception) currently use proof-of-work as a means of deciding which of the transactions are accurate and how blocks of transactions are bundled and documented on the blockchain, forming an immutable (or censorship-resistant) ledger.
Proof-of-stake, which Ethereum moved to in v2, entails a system of delegated consensus, by which holders of the currency elect to put up some of their coins as collateral and use that collateral to vote as a means of finding consensus (the risk is that if you back bad actors, you will lose your stake or the collateral that you put up). There are other forms of consensus that some crypto projects are trying out too.
4. Bitcoin Price
Most conversations about Bitcoin eventually find their way to the price of bitcoin. And for good reason. The price movements of bitcoin, since its inception, have been historic. The bitcoin price is characterized by heavy volatility. That means that instead of a steady rise in price over the last decade, bitcoin’s price has zig-zagged, reaching all-time highs several times, only to retrace some of its steps, retreating from the highs only to rebound again. One important thing to understand is that on a yearly basis, the price of bitcoin keeps increasing, even if the daily or weekly bitcoin price might see wild fluctuations.
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A good understanding of blockchain technology and Bitcoin protocol is very necessary for any crypto trader or investor. Blockchain has already transformed the world economy as a whole, and still has more goodies for different sectors of the economy, not only in the crypto technology or cryptocurrencies. Blockchain technology can be used to improve almost any field you can think of. Stay in touch and watch out what this innovative technology has to offer. Do you have any question regarding to this topic? Feel free to drop it in the comment section below. Enjoy!
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