Explaining the Tech behind Cryptocurrencies
Published on December 6th, 2018
According to IDC forecast, worldwide spending on blockchain solutions is to reach $2.1 billion in 2018, more than double the $945 million spent in 2017.
A blockchain is a relatively new kind of database that has become the trendy solution for storing digital information more securely.
Since it’s a new technology, you will mostly get a stuttering response defining blockchain. We’ve tried to resolve most of your confusion about blockchain by answering top 14 queries around the new technology:
1. What’s Blockchain Technology?
Blockchain technology offers a way for untrusted parties to reach consensus on a common digital history. A common digital history is important because digital assets and transactions are in theory easily faked and/or duplicated. Blockchain technology solves this problem without using a trusted intermediary.
2. Does blockchain have something to do with Bitcoin?
Bitcoin is a cryptocurrency and the blockchain is the technology that underpins it. A cryptocurrency refers to a digital coin that runs on a blockchain.
The first blockchain was the database on which every Bitcoin transaction was stored. Since Bitcoin began in 2009, the blockchain has come to hold over 160 gigabytes worth of data.
Bitcoin is the brainchild of a mysterious person or group of people known as Satoshi Nakamoto. Nobody knows the identity of Nakamoto, but their vision was laid out in a 2009 whitepaper called “Bitcoin: A Peer-to-Peer Electronic Cash System.”
3. What’s Bitcoin?
Bitcoin is a “peer-to-peer electronic cash system” that “allow[s] for online payments to be sent directly from one party to another without going through a financial institution.”
Bitcoin is a decentralized, public ledger. There is no trusted third party controlling the ledger. Anyone with bitcoin can participate in the network, send and receive bitcoin, and even hold a copy of this ledger if they want to. In that sense, the ledger is “trustless” and transparent.
4. Why is it called a blockchain?
In the original documents describing Bitcoin, the virtual currency’s new database was not referred to as a blockchain. But it got that name over time because all of the transactions coming onto the network were grouped into blocks of data and then chained together using sophisticated math.
5. How is the blockchain different than other databases used to store transactions?
Most databases used to keep financial records are maintained by a central institution. With Bitcoin’s blockchain database, the ledger is kept and updated communally by all the computers that are hooked into the Bitcoin network.
Because the records are kept communally, no one computer or institution is in charge. If any one computer keeping the records is hacked or knocked offline, the other computers can go on without it.
6. Are blockchains used only for recording virtual currency transactions?
No. Of late, many companies and governments have been interested in using blockchains to store data that has nothing to do with virtual currency transactions, or transactions of any sort.
While banks are building blockchains that can track payments between accounts, governments are experimenting with using blockchains to store property records and votes.
A blockchain could be used to establish ownership over any number of physical assets — cars, art, musical instruments, and so on. A blockchain means there is no single entity controlling the ledger. Therefore, recording physical assets on a blockchain is a prime example of where the technology might come in handy to track ownership with a tamper-proof, neutral, and resilient system.
The blockchain technology could even prove applicable in virtual reality. If a virtual world is created — for gaming, or for any number of other reasons — blockchain technology could allow users to purchase and own pieces of that virtual world.
As a matter of fact, blockchain is revolutionizing almost every industry and here are some immediate use cases of blockchain technology.
Here are some decentralized applications attacking different verticals:
7. Haven’t all the thefts involving Bitcoin shown that blockchains aren’t secure?
Most of the thefts involving virtual currencies are a result of people’s having the password, or private key, to a virtual currency wallet stolen or hacked. Virtual currencies are particularly vulnerable to this kind of attack because once a hacker moves money out of a wallet, there is no central authority to move it back. Any blockchain wallet or account is generally only as secure as its private key.
While private keys are a security vulnerability, blockchains are generally more secure against attacks in which a bad actor tries to change the records in the database. Because of the way blocks are chained together, it is obvious when someone has tampered with old records.
8. What is Ethereum?
While Bitcoin is, effectively, a decentralized application for payments. Ethereum adds another layer by allowing users to put code on its blockchain that executes automatically. This code is called a “smart contract.” In this way, Ethereum hopes to create a decentralized computing platform — a global supercomputer.
9. What are initial coin offerings (ICOs)?
An ICO is simply:
- The sale of tokens by a blockchain company looking to raise funds.
- These tokens are often subsequently traded on cryptocurrency exchanges.
- Investors in ICOs hope to turn a profit by buying early access to potentially foundational decentralized applications, just as early investors into bitcoin and ether did.
10. Why are ICOs so controversial?
Initial coin offerings could represent a big shift in how companies raise money and/or incentivize various stakeholders (e.g., developers, investors, users).
At the same time, ICOs are on shaky regulatory footing-many have come under fire for a lack of transparency, no viable product, or even fraud.
11. What is Bitcoin Cash?
Bitcoin Cash is not the same thing as Bitcoin, although it shares much of its history with that protocol.
Bitcoin Cash is a new network that “forked” from the Bitcoin network at the beginning of August 2017. In the blockchain space, a “fork” is what happens when developers in the network decide to materially change the code of the platform. Nodes, run by miners, can update to the new code — if enough nodes make the switch, it can become a completely new platform with its own token.
12. Why is Bitcoin Cash controversial?
Supporters of Bitcoin Cash and Bitcoin commonly spar over the functionality of the two coins.
While Bitcoin supporters identify the original blockchain as the “true” Bitcoin protocol and dismiss Bitcoin Cash, supporters of Bitcoin Cash claim that their protocol does a better job of fulfilling Bitcoin’s initial goal of being peer-to-peer cash.
13. Do we know if blockchains really are better than old ways of recording data?
We don’t, really. Virtual currencies have shown that blockchains can work at some level, but they also come with significant downsides. Because all the computers on the network have to record every transaction, there are limits to how much data blockchains have been able to process. There are many efforts to fix this, but none have been proven to work.
14. What’s the future of blockchain technology?
Ultimately, blockchain is as much a political and economic hypothesis as a technological one.
Blockchain technology provides a new way to think about how we agree on things. For the first time, multiple untrusted parties can create and agree on a single source of truth, without the use of a middleman.
The technology’s implications for traditional middlemen and corporate players are therefore potentially enormous.
As the landscape evolves, the future of blockchain will likely take on forms yet to be imagined.