By this time, it’s safe to say that most people who’ve spent any significant amount of time online have heard about cryptocurrencies, most likely in the context of Bitcoin, the most well-known of the cryptocurrencies.
Then there’s the term “blockchain,” which may not be as well-known but is just as crucial as cryptocurrency. In fact, if blockchain didn’t exist, neither would cryptocurrency!
So, let's dive into the worlds of blockchain and cryptocurrency, get a solid grasp of what they are, what they're suitable for, and why they're going to be around for a long time.
What is Blockchain? Decentralizing all things digital
Blockchain is a type of database, a digital record of transactions. Unlike traditional databases, blockchains store their data in blocks which are in turn chained together, hence the clever name. When new data arrives, it gets placed in a new block, which is then attached to the existing chain.
Think of blockchain like a freight train, with each boxcar (block) filled with freight (data). When there’s more freight to be hauled, the workers load a new boxcar and hitch it to the train.
Blockchain records cryptocurrency transactions like Bitcoin. It’s a decentralized ledger of all confirmed transactions conducted over a peer-to-peer network.
Bitcoin’s use isn’t limited to cryptocurrency but can also be used in voting rolls, medical data, personal identity security, settling stock trades, and fund transfers. Here’s a breakdown of the steps:
Someone initiates a transaction. The requested transaction gets broadcasted to a P2P network made up of computers called “nodes.” The network of nodes validates both the transaction and the user’s status using known algorithms. When the transaction gets verified, it is added to other verified transactions, creating a new data block for the ledger. The new block is permanently and unchangeably added to the current blockchain. The transaction is complete!
And What is Cryptocurrency? Virtual money for the digital economy
Cryptocurrency is virtual money, secured by cryptography, and used to make online purchases of goods and services, much like regular money. Currency ownership records get stored in electronic online ledgers that rely on blockchain technology.
Bitcoin is the most well-known form of cryptocurrency, but it’s not the only one out there. Other cryptocurrencies include Etherium, Binance Coin, XRP, Tether, Filecoin, and Cardano, to name a few. There are more than 6,000 different cryptocurrencies out there!
Remember the good old days of video arcades? You’d drop 20 bucks into a machine, get a fistful of tokens, and go nuts playing the games. Think of digital currency as gaming tokens, something you buy from the issuer and then use (or trade) to conduct transactions.
However, the analogy breaks down when you realize that cryptocurrency doesn't involve Pac-Man or Space Invaders.
Many people like cryptocurrency because of the extra security it affords (more on that later), and it excludes central banks from the equation. Both advantages exist thanks to decentralization, and speaking of which…
The Power of Decentralization The 21st-century data revolution
In the political context, decentralization means that governing power shifts away from a central political leadership and instead goes to local governing powers. In the world of Information Technology and blockchain, however, decentralization refers to transferring data, control, and decision-making from a central resource (e.g., an individual, group, or organization), to a distributed network.
Decentralized networks aim to lower the amount of trust that participants need to have and prevent anyone from exerting authority over each other.
There are three primary reasons why organizations are taking a closer look at decentralization.
Customer data is becoming increasingly scarce. Although Big Data still has businesses drinking from the proverbial firehose, it doesn’t mean that all types of data are so abundant. Retailers, online commercial sites, social media platforms, and search engines are getting stingier with their sharable data. Of course, the data hoarders aren’t totally heartless; they’re certainly willing to share some of their customer data…for a price!
Data transfer regulations are on the rise. International privacy measures have brought data transfer practices (both internally and inter-company) under greater scrutiny. The so-called solution for many companies is to expect their software vendors to bear the monetary risk of violating security regulations. Unsurprisingly, many vendors aren’t very keen on exposing themselves this way.
Customers want their cloud/service vendors to be on the same cloud as they are. If a business runs its databases on one cloud, they want their vendor to either be on that same cloud or easily integrate with them. For example, say you run a thriving pet grooming business, and you’re looking into cloud computing. You decide you want a Software as a Service (SaaS) vendor to store data and run your applications on Microsoft Azure. But if the vendor uses AWS, they will have to investigate data partitioning or running software on several clouds.
Furthermore, there is also the issue of data location. For instance, a large organization keeps its data in AWS’s East Coast region but uses software from a different SaaS vendor. When SaaS vendors share data with another SaaS provider, both participants must figure out how to move and replicate data from one region to another.
Although decentralization isn’t the universal cure-all that works in every case, it provides an attractive alternative to centralized, all-in-one data warehouses and “data lakes,” which have demonstrated particular security and reliability issues.
The Advantages of Blockchain Technology and Cryptocurrency Unsurprisingly, security weighs heavily here.
Both blockchain and cryptocurrency have become popular for a reason, or many reasons, actually. Let’s look at some of their benefits.
Blockchain
Greater security. Blockchain creates unalterable records that are encrypted from end to end. This measure prevents unauthorized entry and fraud. You can also boost privacy by anonymizing sensitive personal data and adopting permissions to limit access.
Increased transparency. Before blockchain, every company or organization had to maintain a separate database. Blockchain’s distributed ledgers record and save all data and transactions to numerous locations. Every network member can see the same information simultaneously.
It’s faster and more efficient. Blockchain streamlines processes and transactions that are otherwise paper-heavy, prone to human error, and time-consuming. Blockchain also stores documentation and transaction details.
Data is instantly traceable. Blockchain produces a multi-step audit trail that documents every asset’s origin through every step of the process.
Cryptocurrency
No banks. Cryptocurrency does away with the “middleman,” otherwise known as central banks. Over time, banks reduce money value by inflation. Cryptocurrency also puts an end to banking fees and arbitrarily restricting large transactions.
It’s secure. Cryptocurrency relies on blockchain technology, which has already demonstrated its strong security chops. This benefit means secure data and greater confidentiality.
Improved access. Thanks to the Internet and digital data transfer, anyone with an online connection has easy access to asset transactions and transfers.
It makes international trade seamless. Think about it: no need to mess with foreign currency exchange rates, transaction charges, or levies imposed by different nations.
It’s your money. With a traditional credit card or banking system, you entrust your funds to a third party. Your money is ultimately under their control and at their mercy. With cryptocurrency, you call the shots; you’re the sole owner of those assets.
Applications of Blockchain Technology Security and versatility? Yes, please!
By now, you probably get the idea that blockchain technology is a perfect fit for our increasingly digital society. We’ve already established that it’s a secure process, and security is a huge concern today, dominating headlines and making us all wonder if our checking accounts are safe.
But blockchain has countless potential uses. Here are some examples of how blockchains could potentially bring game-changing benefits to our everyday lives.
Financial Services. Blockchains offer transparency, robust encryption, and risk-free management. Industries like trade/asset management, cross-border payments, and insurance claims stand to benefit significantly from blockchain technology. For instance, these tools can help speed up insurance claims processing, helping insurance processors deal with fraud, obsolete policies, or incomplete records.
Smart property. You can register things like houses, appliances, and cars in a decentralized ledger. This registration process could include contract details, deeds, property rights, etc. Once contracts are verified, parties can even exchange smart keys. Smart property applies to concepts like car ownership, the Internet of Things, and moneylending.
Smart contracts. Speaking of smart contracts, yes, that’s a thing too. Blockchain allows smart contracts, which are digital documents embedded with an IFTTT code (it stands for “If-this-then-that”). Smart contracts are self-executable, eliminating the need for third-party intervention. Once the parties meet all the conditions, the terms get automatically implemented. Smart contracts can be used in voting/voter registration, music ownership, and healthcare records.
Key Blockchain and Cryptocurrency Milestones and Events Banner moments in digital history
Here is a brief history of blockchain technology and cryptocurrency.
1991: Stuart Haber and W. Scott Stornetta created the concept eventually called “blockchain.” They started by working on a cryptographically secured chain of blocks whose document timestamps were untouchable.
1992: Haber and Stornetta upgrade their system with Merkle trees (a tree-like data structure) to collect more documents on a single block.
2008: Satoshi Nakamoto creates the concept of blockchains as we know them today.
2009: Nakamoto releases a whitepaper on Bitcoin technology, envisioning this electronic peer-to-peer system where technology was now well equipped to improve digital trust, considering how decentralization removed that “all in one” control.
2010: The first Bitcoin purchase happens.
2013: The Bitcoin marketplace exceeds $1 billion. Vitalik Buterin releases his Ethereum whitepaper.
2014: Ethereum Blockchain gets funded by a crowdsale. R3 Blockchain technology is created, forming a Consortium of more than 40 legacy financial companies to implement Blockchain technology.
2015: Linux introduces Hyperledger to improve blockchain development, while the Ethereum Genesis block is created.
2017: Block.one unveils EOS, a new blockchain protocol for deploying centralized applications.
2021: Major retailers from Starbucks to Microsoft start accepting Bitcoin as payment for their products and Tesla invests $1.5 billion in Bitcoin.
The rest of blockchain and cryptocurrency’s stories are yet to be written. Only time will tell how much impact these fascinating technologies will have on how we work, spend money, and live. Whatever the outcome, the next ten years will certainly be interesting!