Aspire Thought Leadership! Wondering What is Blockchain and cryptocurrency? Find out more on Blockchain and cryptocurrency basics and how fortune 500
The concept behind ‘Blockchain’ technology was first outlined in 1991 by research scientists Stuart Haber and W. Scott Stornetta [What is Blockchain?]. They proposed a computationally practical method that added time stamps to digital documents, so that they could not be backdated or altered. The system was to use an encrypted chain of blocks to store the time-stamped documents. In 1992, Merkle trees were included in the design. A Merkle tree is a structure used by computer applications to organize data [examples of disruptive technology]. This made it possible for multiple documents to be collected and stored in one block. After its development, the technology was not used and the patent ended up lapsing in 2004 [What is Blockchain Development?].
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| Blockchain and Cryptocurrency basics |
In that same year, a computer scientist named Harold Finney launched a system called RPoW or Reusable Proof of Work. The system worked by collecting non-exchangeable Hashcash based Proof of work tokens and then generating an RSA. It is a signed token that could be passed on from person to person. Hashcash is a proof-of-work model and RSA is a technique used to encrypt a public-key used for secure data transmission especially over the internet. When you are spending tangible money, it’s hard to spend the same coin or note twice, because the transaction is happening in the presence of one or more people. Double spending was a term coined after the rise of bitcoin, it describes the possibility of spending the same unit of cryptocurrency more than once. RPoW solved this problem by keeping records of the ownership of tokens and registering them on a server that allowed users to validate their authenticity immediately [benefits of blockchain].
In 2008, a Whitepaper was posted to a cryptography mailing list by someone, or a group of people, using the pseudonym Satoshi Nakamoto. The paper presented a decentralized, peer-to-peer, electronic cash system based on the Hashcash POW algorithm, called Bitcoin. (Binance Academy, 2018). It proposed the use of a decentralized peer-to-peer protocol that could trail and validate any and all transactions.
On the 3rd of January 2009, the first Bitcoin block was mined by Satoshi Nakamoto. It yielded him a reward of 50 Bitcoins. The first ever Bitcoin transaction took place on the 12th of January when Nakamoto sent Harold Finney 10 Bitcoins.
Blockchain and cryptocurrency basics
In 2013, a programmer named Vitalik Buterin expressed that Bitcoin needed a scripting language for building decentralized applications [application of blockchain]. He then started developing a new Blockchain-based distributed computing system called Ethereum. A distributed computing system has numerous pieces of software on several computers but run as one system. The computers in the system can either be in close proximity to each other sharing a local network, or they can be dispersed in different areas and connected by a Wide-area network. Ethereum has a scripting feature called Smart Contracts [smart contracts in blockchain]. Smart Contracts are scripts that are implemented on the Ethereum Blockchain. They can be used to make transactions if specific conditions are met. They are written in specific coding languages and arranged into Bytecode. Bytecode is source code that has been simplified for a software interpreter to understand. The Ethereum Virtual machine then reads and executes the transactions. The EVM is often called a virtual CPU because it is not tangible and is run on hundreds of machines worldwide.
Developers can produce apps that run inside the Ethereum Blockchain. These apps are called DApps (Decentralized Applications). There are hundreds of apps running on the Ethereum blockchain, including various social media platforms. Blockchain technology is becoming more conventional and is even used in applications outside of the cryptocurrency space [IoT and Blockchain].
Blockchain and Cryptocurrency basics: How Does a Blockchain Work?
Blockchain is an apt name for this system. Like the name states, a blockchain is a chain of blocks that contain information. It is a distributed ledger that is open to anyone. A ledger is a bookkeeping system that contains all of a company’s financial data. It records each and every transaction that happens from day one. It also contains the account information that company’s use to prepare their financial statements [blockchain for enterprise].
Once data has been recorded inside a block it is virtually impossible to change. Each block has three components; the data, the hash and the previous block’s hash. The data depends on what kind of block it is. The hash works the same way a fingerprint does in that it can’t be duplicated and you can use it to identify a single block and all it’s content.
If a piece of data in the block changes, so does the hash. Hashes are useful because they help in identifying any changes that have happened within a block. The hash of the previous block is what links all the blocks together like a chain. This is what makes a blockchain so secure.
If we had three blocks in one chain then block three would contain block two’s hash and block two would contain block one’s hash. The first block only has its own hash so it’s called the Genesis block.
In the event that the second block is interfered with, its hash will change and that would invalidate all the blocks that come afterward because block three would not contain a valid hash. While a blockchain is inherently secure, computers are developing and increasing their capabilities on a daily basis so it’s not impossible for blocks to be interfered with.
To abate any interference, blockchains have something called Proof of Work (PoW). PoW works to slow down the building of new blocks. It’s helpful because if you were to meddle with block two, you would have to do the proof of work for every block that comes after it.
In order to manage the chain, blockchain uses a Peer-to-peer network. A peer-to-peer network is where two or more computers are able to share files without having to connect to one server. As soon as a new user joins the network they have full access to the entire blockchain and all its data.
The node is used to verify the data. A node can either be a redistribution point, a communication endpoint or a connection point. In a blockchain it is a connection point. A node can register information, process it and then send it to other nodes.
If a new block is added it gets sent to all the computers on the network. The node verifies the block and then adds it to the blockchain. All the nodes in the network create consensus by agreeing on which blocks are valid and which are not. If a block has been interfered with it gets rejected by all the nodes in the network.
Because blocks are constantly changing, Smart Contracts were developed. They are programs that are kept in the blockchain. They automatically exchange coins if certain conditions are met.
Different Types of Blockchains
Private Blockchains
Access to Private blockchains is invitation based. Users can be validated by a rule set by the central administrator of the network. Only some users can have access to the network and of those few, there are limits on the kinds of transactions they can perform. These kinds of blockchains use a Proof of Authority consensus approach (PoA). PoA is part of a consensus algorithm that gives a small group of users on a blockchain the authority to validate transactions on the network. PoA is mostly used within secure business environments to control access and record keeping because the transaction data is not usually visible to them.
Public Blockchains
Public blockchains are all about engagement and transparency. Transaction consensus is not centralized, so anybody can take part in authenticating network transactions and the software code is open source. This means it is available to the public. Public blockchains are decentralized through crypto-economics to promote cooperation throughout a network. There isn’t a sole entity controlling the network and there is no central point of failure. The consensus algorithms used in a public blockchain are PoW and Proof of Stake (PoS). PoS is an algorithm that processes transactions and creates new blocks in a chain. It is used to validate any data entries and keep the database secure.
Consortium Blockchains
No one ever talks about Consortium blockchains because they are not widely used [blockchain industry]. They can be described as a combination of both public and private blockchains because they have a ‘semi-permissioned’ approach. Consortium blockchains’ participants are usually known and have been authorized by a central authority to participate in the consensus. This kind of blockchain is semi-decentralized while still offering some level of control. Transaction data is also kept private. Consortium blockchains make use of all three consensus algorithms; PoW, PoS, and PoA.
What Is Cryptocurrency?
Most people know what cryptocurrency is, but not many understand it. Until around ten years ago, all forms of modern currency were controlled and regulated by banks and governments. This means that the regulatory authority was centralized, and that restricted the capabilities of tangible money and credit cards. While modern banking has come a long way in recent years, it has its issues. When two parties are exchanging money, it’s possible for there to be a single point of failure. The bank can have a glitch in the system or one party’s transfer limit could have been reached.
Cryptocurrency removes all the problems of modern banking because there is no single point of failure. A single point of failure happens when a vital part of a system ceases to function, thus causing the entire system to fail. Crypto is a virtual currency that is used as a medium of exchange. It works in a similar way to any other currency, it just isn’t tangible and operates using cryptography. Cryptography is a way to protect information using code, so that only the relevant parties have access to it.
Cryptocurrency Key Features
Cryptocurrency is decentralized
Banks and governments control the economic system in the outside world. In the digital realm, there are no third-parties and transactions can be processed and authenticated via an open network that doesn’t belong to an entity.
Cryptocurrency is immutable
When something is immutable, it cannot be changed.
Cryptocurrency is anonymous
There is no need for users to identify themselves when trading cryptocurrency because there is no third-party. The network processes, authenticates and documents all transactions on the blockchain.
Cryptocurrency has a finite supply
When most cryptocurrency is created, it has a predetermined amount to be mined out of the system. Other digital currencies may not have an actual limit, but they do control the amount of new coins that can be generated on a yearly basis.
Transactions are irreversible
Because there is no management by any central authority, there isn’t a body or an organization that can intervene when any kind of mistake is made. So if you were making a transaction and you happened to enter the wrong details and it gets sent through, it cannot be reversed and there is no organization that you can reach out to for support.
Characteristics of a Good Cryptocurrency
Security
Anybody who has assets they can’t actually touch wants to be sure that they are safe at all times. Cryptocurrencies stay in a digital ‘wallet’. A wallet is essentially just a long line of letters and numbers. It can also be called a private key and it allows its owner to withdraw coins. There is a shorter line of numbers linked to the private key that allows a user to accept deposits. This number is called a public key. When two wallets share a transaction, that data is entered into a block which is then added to a ledger. Once all of this information reaches the ledger it cannot be changed.
Scalability
When a cryptocurrency is scalable, it means it can confirm a large number of transactions, usually per second. When trading cryptocurrency, a user wants to know that all transactions are going to happen fairly quickly and without fail. Because of innovations in technology there are apps that offer speedy transactions of normal money like Paypal. This means that cryptocurrencies need to be processed at a speed of no more than 3 seconds at a time.
Usability
Like most things, cryptocurrency needs to be easy to navigate. It can be daunting for a new user or for somebody who is considered a technophobe. A well developed cryptocurrency has a lot of complicated things going on in the background but should always appear to be easy on the user’s end. Also, it is always best to use cryptocurrencies that you can transact with via a mobile app and not on a web page [blockchain use cases].
Demand
The more demand there is for any given cryptocurrency, the more valuable it becomes. When there is enough interest in the market and the price of a certain coin rises, it will be beneficial to users.
Finite supply
Most, if not all cryptocurrencies have a limited amount of coins in existence. The number of coins available is determined upon inception and was calculated by mathematics. Some cryptocurrencies release all their coins at once and others release them bit by bit in an attempt to keep the price stable. In the long run, a good cryptocurrency is determined by its adherence to good economic practices.
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