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Blockchain And Digital Currencies 101

Updated: Oct 21, 2019

| B + T |


WHAT ARE DIGITAL CURRENCIES?


A digital currency (or crypto currency) is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions and to control the creation of additional units of the currency. Cryptocurrencies are classified as a subset of digital currencies and are also classified as a subset of alternative currencies and virtual currencies.


Bitcoin, created in 2009, was the first decentralized cryptocurrency. Since then, numerous cryptocurrencies have been created. These are frequently called altcoins, as a blend of bitcoin alternative. Bitcoin and its derivatives use decentralized control as opposed to centralized electronic money/centralized banking systems.


The decentralized control is related to the use of bitcoin’s blockchain transaction database in the role of a distributed ledger.


WHAT ARE BLOCKCHAINS?


A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp and transaction data. By design, blockchains are inherently resistant to modification of the data. A blockchain can serve as “an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.


For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which needs a collusion of the network majority.


Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain. This makes blockchains potentially suitable for the recording of events, medical records, and other records management activities, such as identity management, transaction processing, documenting provenance, or food trace-ability.


The first distributed blockchain was conceptualized by an anonymous person or group known as Satoshi Nakamoto, in 2008 and implemented the following year as a core component of the digital currency Birtcoin where it serves as the public ledger for all transactions. The invention of the blockchain for bitcoin made it the first digital currency to solve the double spending problem without the use of a trusted authority or central server. The bitcoin design has been the inspiration for other applications.


THE IDEA OF DECENTRALIZATION


By design, the blockchain is a decentralized technology. Anything that happens on it is a function of the network as a whole. Some important implications stem from this. By creating a new way to verify transactions aspects of traditional commerce could become unnecessary. Stock market trades become almost simultaneous on the blockchain or it could make types of record keeping, like a land registry, fully public. And decentralization is already a reality.


A global network of computers uses blockchain technology to jointly manage the database that records Bitcoin transactions. That is, Bitcoin is managed by its network, and not any one central authority. Decentralization means the network operates on a user-to-user basis. The forms of mass collaboration this makes possible are just beginning to be investigated.


WHO WILL USE THE BLOCKCHAIN?


As web infrastructure, you don’t need to know about the blockchain for it to be useful in your life. Currently, finance offers the strongest use cases for the technology. International remittances, for instance. The World Bank estimates that over $430 billion US in money transfers were sent in 2015. Currently, there is a high demand for blockchain developers.


The blockchain potentially cuts out the middleman for these types of transactions. Personal computing became accessible to the general public with the invention of the Graphical User Interface (GUI), which took the form of a “desktop”. Similarly, the most common GUI devised for the blockchain are the so-called “wallet” applications, which people use to buy things with Bitcoin, and store it along with other cryptocurrencies.


Transactions online are closely connected to the processes of identity verification. It is easy to imagine that wallet apps will transform in the coming years to include other types of identity management.


THE BLOCKCHAIN & ENHANCED SECURITY


By storing data across its network, the blockchain eliminates the risks that come with data being held centrally.


Its network lacks centralized points of vulnerability that computer hackers can exploit. Today’s internet has security problems that are familiar to everyone. We all rely on the “username/password” system to protect our identity and assets online. Blockchain security methods use encryption technology.


The basis for this are the so-called public and private “keys”. A “public key” (a long, randomly-generated string of numbers) is a users’ address on the blockchain. Bitcoins sent across the network gets recorded as belonging to that address. The “private key” is like a password that gives its owner access to their Bitcoin or other digital assets. Store your data on the blockchain and it is incorruptible. This is true, although protecting your digital assets will also require safeguarding of your private key by printing it out, creating what’s referred to as a paper wallet.


A SECOND LEVEL NETWORK


With blockchain technology, the web gains a new layer of functionality. Already, users can transact directly with one another; in 2016, Bitcoin transactions averaged over $200,000 US per day. With the added security brought by the blockchain new internet business are on track to un-bundle the traditional institutions of finance. Goldman Sachs believes that blockchain technology holds great potential especially to optimize clearing and settlements, and could represent global savings of up to $7 billiion per year.




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