Basic Understanding of Blockchain and Cryptocurrencies
In 1991, the research scientist Stuart Haber and W. Scott described Blockchain technology as a structure that could store transactional records known as blocks in several databases – known as the chain in a secured network. Blockchain technology is not just used for keeping the records secured and confidential but it’s also used for many other things such as creating Cryptocurrencies such as Bitcoin, transferring money and processing payments, creating smart contacts etc.
So how does Blockchain work, exactly?
Keeping in mind the previous breakdown of blockchain – blocks and chains, there is a single block in the chain that contains a certain amount of elements in it including data, cryptographic hash (a fundamental to Blockchain) and hash of the block before it.
*Hash – it is the fingerprint for that particular block represented as a unique identifier that connects the block to it’s content
The cryptographic hash changes with the change in the data in the block. The use of unique identifiers helps to add immense security and confidentiality to the block.
Above this, there is placed another level of security called the Proof-of-work where because of this mechanism, creating new blocks in the chain takes a set amount of time. In other words if someone were to tamper with the block and access it’s confidentiality, they’d have to recalculate the proof-of-work for every block, which would take a lot of time and processing power.
This is then covered with the final layer of peer-to-peer (P2P) network. This P2P network creates a consensus, as each user(node) verifies and validates the data.
Nowadays Industries like the healthcare, supply chain and Fintech are using systems built on blockchains in their business models. This led to the growth in the role of a block chain Developer by 488% till the year 2021.
Blockchain technology has had a greater impact on people trying to improve their professional skills. In the US, UK, France, Germany and Australia, Blockchain was the most in-demand skill on LinkedIn as per their 2020 report. This Blockchain developer, along with these set of skills, also need to acquire expertise in several other areas such as cryptography, blockchain architecture, data structure, smart contacts and web development.
After going through some of the applications of blockchain technology across various industries, the next area to explore in this topic is cryptocurrency. Cryptocurrency is digital money but unlike regular government-issued currency like Dollars, Pounds, Yet it is decentralised (Not regulated by a central authority, such as a bank, government, or country). Major difference between crypto assets and other kinds of money is that cryptocurrency does not exist in a physical format. The currency is not based on another asset such as gold. Moreover it is not stored in a bank or financial institution. These cryptocurrencies are based on blockchain technology. There are more than 4,000 cryptocurrencies in existence with some of the most well-known being Bitcoin and Ethereum.
Blockchain technology creates blocks of data in the chain with unique identifiers, referencing the block before them and these blocks of data are shared and verified across a distributed network of users. Cryptocurrencies follow the same principle and uses and records transactional data in the blocks.
Cryptocurrency mining is another aspect of the blockchain and cryptocurrency where to add a new block to the blockchain, a small percentage of users in the network race to solve a very complex math puzzle. The winner in this process gets the right to add the new block to the blockchain and this goes in the official record on the public ledger and the person who solved it is rewarded with an amount of cryptocurrency. Crypto mining requires specialised computing hardware often making it impossible for casual users to mine even one block.
Benefits of Cryptocurrency
- Self-governed and managed: As these digital currencies are decentralised,no one authority can influence the price. The peer-to-peer network members are responsible for the integrity of the currency.
- Security and privacy: Cryptocurrency is a secure basis for the currency as iit offers a large degree of anonymity for transactions.
- Cost-effective: Cryptocurrencies are near-instant as there is no need for a third-party financial institution to handle transactions. Moreover, it is also possible to transfer funds without having to pay excessive fees.
Disadvantages of Cryptocurrency
- Highly volatile: Though there is no one central authority that can alter the price of cryptocurrencies, small groups of users can possibly influence the unregulated market. This means that prices can rapidly rise and fall, making them an insecure investment.
- Exposure to Risk: Once the cryptocurrency wallet’s private key is lost, one can lose access to all the funds that are in there. Adding to that, the exchanges that store this wallet data aren’t always that secure.