Two of the most interesting technologies of the decade are blockchains and cryptocurrency. Despite their widespread popularity, many people are still yet to understand how a blockchain works. Ideas for similar technologies have been around since the 1980s, but the first real implementation of a blockchain took place in 2008 with the release of the revolutionary cryptocurrency known as Bitcoin. Since then, thousands of similar new cryptocurrencies have been created, further popularizing blockchains. According to its creators, Bitcoin is a form of decentralized digital currency built on a blockchain with peer-to-peer technology that enables fast and effortless money transfer.
Blockchain Technology Explained
The most prominent role of blockchains is keeping track of certain events as they happen, kind of like a record book that can be modified by anyone. To ensure legitimacy and authenticity, an intricate computer technology called cryptography is put into action. Combined with peer-to-peer networks, the result is a trusted ledger that lies at the heart of cryptocurrency.
As its name suggests, a blockchain consists of an ordered chain of blocks, each containing data of a specific type. In the case of the Bitcoin blockchain, each block includes records of the transactions that take place on the network. What’s peculiar about it is that anyone can join this network and broadcast new transactions to the chain, making it decentralized, publicly accessible, and non-custodial. This works by having every member keep their own copy of the blockchain, broadcasting changes to others as they occur. This does raise several concerns, however. If anyone can add information to the blockchain, what is stopping malicious members from creating fraudulent transactions under fake identities, and how can the network decide which version of the blockchain to trust?
This is where cryptography is factored in. A certain cryptographic algorithm SHA-256 plays an important role in verifying transactions as well as entire blocks on the blockchain. The main purpose of this function is to return a string of bits of a fixed length – also known as the “digest” or “hash” – for every piece of data that is fed into it. It works in an irreversible manner, so the original data cannot be reconstructed from the digest, and a fixed input will always yield the exact same output. Should this input be even slightly altered, the resulting digest would be entirely different. The only possible way to reverse this function involves trying every possible combination until a match is found, but the number of combinations is so ridiculously enormous that it is deemed virtually impossible. By requiring any added transaction to be signed using a hash generated by its author, another cryptographic algorithm can then determine if this hash is valid, and consequently the transaction itself.
On the Bitcoin blockchain, transactions are arranged into groups, or blocks, of 2400. Each block contains in its header the hash of the previous one as an effective way of keeping track of the block order. To verify each block and make it trusted by the network, an interesting method called “Proof-of-Work” is implemented. It requires every new block to have a substantial amount of computational work put into it. This is achieved by adding a variable piece of data to each block so that the hash of this block meets a certain requirement. Here is where miners come into play, trying all possible combinations of the variable data until that requirement is met. The first miner to solve the puzzle receives a certain amount of Bitcoin as a bonus and broadcasts the newly verified block to everyone else on the network. If someone attempts to make changes to a block, it would entail calculating the proof-of-work for all the blocks that will ever follow, requiring them to control more than half of the miners on the network. This explains why the network grows more secure as additional miners join. To determine the balance of a certain user, the transaction history of this user is simply collected from the blockchain and summed up.
How Bitcoin is Changing the World
The spread of cryptocurrencies is slowly changing the world. Many users are choosing crypto over traditional cash as it provides a multitude of facilitations to everyday life. This includes the widespread availability, ease of transfer, and anonymity provided by Bitcoin.
A rapidly increasing range of international companies are beginning to accept crypto as a form of payment. Compared to bank transfers, Bitcoin payments are faster, easier, and impose significantly lower fees. Considering other emerging cryptocurrencies like Bitcoin Cash (BCH) that are designed with everyday transactions in mind, cryptocurrency may soon become the top payment method worldwide. Cryptocurrency is certainly cool, while fiat money is certainly practical, but it can be said that new cryptocurrencies may bring the best of both worlds, providing great functionality while still looking sleek, just like a pair of prescription sunglasses that you might also someday pay for, using cryptocurrency.
The only major downsides of cryptocurrencies are their extreme volatility and potentially negative environmental impact. While most crypto coins maintain a somewhat fixed price, there is always a slim possibility of a sudden drop in their value. On the bright side, certain “stable coins” have been developed to mitigate this. They are backed by actual gold to maintain a stable value, eliminating the risk of loss. Regarding environmental impact, despite crypto miners requiring large amounts of electrical energy, it is still significantly lower than that of banks. It was found that the Bitcoin ecosystem currently consumes less than 10% of the total energy used by the banking system worldwide.
Although cryptocurrencies are still somewhat contemporary, they have already changed a lot in the world and are exhibiting great potential. As blockchain technology continues to improve and becomes increasingly efficient, the widespread use of crypto becomes imminent. Maybe someday we will be able to completely ditch traditional money in favor of crypto. Who can tell?