As more and more people hear about Bitcoin’s impressive gains and turn their attention towards cryptoassets, it’s important to make sure we all understand the basics of the technology powering the crypto revolution: blockchain.
A Brief Background of Blockchain
Bitcoin and its underlying technology, blockchain, began as a reaction to the 2008 financial crisis. As banking institutions and central banking systems across the world faltered, one anonymous programmer (or group of programmers), Satoshi Nakamoto, outlined how to decentralize currency and truly put people in charge of their own money. Bitcoin was born shortly after.
An Introduction to Blockchain Technology
Without getting too technical, a blockchain is a record of transactions that is maintained by a worldwide network of computers called nodes. With public blockchains like Bitcoin, anyone can choose to join the network and create a node; those who do so are rewarded for helping to process transactions, often through keeping transaction fees from the transactions they process.
Each of the dots on this image represents a node, or a computer connecting to a blockchain network. Image from explorer.acinq.co.
These nodes talk to each other as they process and record transactions, grouping transactions into “blocks” along the way. As blocks are created and finalized, they are then securely connected to the chain of past blocks using cryptography.Each block contains a set of transactions. New blocks are always added to the end of the chain, and once a block is added it can’t be altered.
The entire blockchain is verified and stored by nodes across the network, and the full history of transaction data stored within the chain is open for everyone to see.
What Benefits Do Blockchains Provide?
The big idea with blockchain is that it doesn’t rely on central entities or third parties such as banks, governments, or companies. Instead, with blockchain, trust lies with the network and the code running the network.
The list below presents a few major benefits the blockchain can provide, but the number of use cases continues to grow as blockchain development advances.
Decentralization Provides Increased Trust
Cryptocurrencies use global networks of nodes (computers) to maintain records and process transactions, and every transaction is verified, secured, and backed up all around the world.
Because the records are distributed throughout this worldwide network, authenticity is preserved and it becomes impossible for a bad actor to make unwanted changes or attack the network. Records are immutable, or unchangeable.
This global network of nodes acts according to the rules of the underlying code. Once the network is running, this code or ruleset can’t be changed unless the majority of nodes on the network agree to the proposed changes, meaning the changes would need to benefit network participants at large.
Moreover, since every node has to follow the code, and no one entity can force a change to the ruleset, there is no central point of failure. This means there is no central entity from which to hack and steal information or funds, no ruling power that can create hyperinflation (the over-printing of money and the resulting decrease in that money’s value), or no way to shut the network down as long as participants continue to support the network.
You can trust that your assets will always be there, and that no one has mishandled them or enforced unwanted rules upon them.
Cryptocurrencies Allow for Security & Independence
You can truly be in charge of your own finances with crypto since you don’t need a bank or other institution to store or manage your assets for you; instead, cryptoassets are stored using a cryptographically secured wallet application of your choosing (more on this later in the guide). Your assets are always available to you wherever you are in the world, and if you understand cryptocurrency safety, they can never be taken away from you.
Cryptocurrencies Allow for Transactional & Operational Efficiencies
Cryptocurrencies allow any person or organization to exchange assets with anyone else in the world in a matter of seconds, 24/7. Compare this to traditional banking services, which can take days or weeks to complete a transaction and often only run during set business hours. In the near future cryptos are expected to be able to handle and even surpass the transaction volume of major credit card companies like Visa and Mastercard.
In addition, transaction fees are almost non-existent with many cryptocurrencies. This is because you don’t need to pay third-parties to manage your transactions, such as banks or companies like Paypal or Western Union. Instead, you only need to pay a network fee to process your transaction. Imagine paying just a few cents to send thousands of dollars anywhere in the world, or getting market exchange rates any time you convert currency. Combine extremely low fees with blazing fast transaction speeds, and it is easy to see how the payments and remittance industries may be some of the first disrupted.
Cryptocurrencies Can Provide Both Privacy and Transparency
The technology behind cryptocurrency transactions can be 100% transparent or 100% anonymous. While some people may use privacy tech for illegal activities (note that privacy does not equate to illegality), the vast majority of use cases will be legal and beneficial to society. Blockchain allows for transparency in how charities, politicians, or executives manage funds, or transparency in the supply chain.
Even through this short list of examples, we can see how the technology behind cryptocurrency can improve on the ways we currently transact and interact with the world around us. As you become more familiar with blockchain and the cryptocurrency world, you will encounter an ever-growing list of use-cases for the technology.
Continue the guide with Part 3: Cryptocurrency Categories