A cryptocurrency is a virtual monetary system controlled and maintained using advanced cryptographic techniques. With the creation of Bitcoin in 2009, cryptocurrency transitioned from an academic concept to a (virtual) reality. 1 While Bitcoin grew in popularity in the years since, it drew significant investor and media exposure in April 2013, when it peaked at a record $266 per bitcoin after soaring 10-fold in the previous two months. Bitcoin had a market value of more than $2 billion at its peak. Still, a 50% drop shortly after prompted a heated debate about the future of cryptocurrencies in general and Cryptocurrency in particular.
So, will alternative currencies eventually supplant traditional currencies and become as common as dollars and euros? Or are cryptocurrencies just a fad that will fade away? Bitcoin is the solution.
What Exactly Is a Blockchain?
A blockchain is a distributed ledger that is shared among computer network nodes. A blockchain, like a database, stores information digitally in digital format. Blockchain’s technology ensures the fidelity and safety of a data record and creates trust with no need for a neutral third party. Blockchains are known best for their critical role in cryptocurrency systems such as Bitcoin in keeping a secure and decentralised record of transactions.
The way data is structured significantly between a traditional database and a blockchain. A blockchain collects information in organisations known as blocks, which hold data sets. When a block’s storage capacity is reached, it is closed and linked to the previous filled block, trying to form a data sequence known as the blockchain. All new information that chooses to follow that newly added block is compiled into a freshly created block, which is then decided to add to the chain once it is complete.
A database typically organises its data into tables, even though a blockchain, as the name suggests, organises its data into chunks (blocks) that are strung together.
When implemented in a decentralised manner, this data structure creates an irreversible timeline of data. When a block is filled, it is set in stone and becomes a part of this timeline. When a new block is added to the chain, it is given an exact timestamp.
How Does Blockchain Function?
The entire point of using a blockchain is to allow people — especially people who don’t trust one another — to share valuable data securely, tamperproof manner.
Blockchain comprises three key concepts: blocks, nodes, and miners.
Blocks
Every chain is made up of multiple blocks, each of which has three essential elements:
- The information is contained in the block.
- A nonce is a 32-bit whole number. When a new block is added, the nonce is generated at random, resulting in a block header hash generation.
- The hash is a 256-bit number that is linked to the nonce. It must begin with a significant number of zeroes (i.e., be extremely small).
A nonce creates the cryptographic hash when the first block in a chain is created. Unless it has been mined, the data in the block is considered signed and will remain forever linked to the nonce and hash.
Miners
Mining is the process by which miners create new blocks on the chain.
Every block in a blockchain has its unique nonce and hash, but it also citations the previous block’s hash in the chain, making mining a block difficult, particularly on large chains.
Miners use specialised software to solve the complicated math problem of determining a nonce that generates an accepted hash.
Because the nonce is only 32 bits long and the hash is 256 bits long, approximately four billion nonce-hash combinations must be mined before the correct one is found. When this occurs, miners are said to have discovered the “golden nonce,” and their block is added to the chain.
Making a change to a previous block in the chain necessitates re-mining the changed block and all subsequent blocks. This is why manipulating blockchain technology is so complex. Consider it “safety in math” because finding golden nonces takes an enormous amount of time and computing power.
Whenever a block is effectively mined, the change is regarded by all nodes on the network, as well as the miner is rewarded handsomely.
Nodes
The concept of decentralisation is one of the most important in blockchain technology. The chain cannot be owned by one computer or organisation. It is instead an immutable network via the chain’s nodes. Nodes can be any electronic device that keeps duplicates of the blockchain and wants to keep the network running.
Each node does have its copy of the blockchain, and for the chain to be modified, believed, and validated, the network must programmatically approve any newly mined block. Because blockchains are translucent, every transaction recorded in the ledger can be easily verified and viewed.
Each participant is assigned a unique alphanumeric identifying number that tracks their transfers.
Combining public info with checks and balances helps the blockchain maintain its integrity and fosters user trust. Blockchains, in essence, are the scalability of faith through technology.
The Benefits of Blockchain
i. Process Integrity – Due to security concerns, this programme was designed so that any block or payment that adds to the chain cannot be edited, resulting in a very high level of security.
ii. Tracking – The Blockchain format is designed so that any problem can be easily identified and corrected. It also leaves an irreversible audit trail.
iii. Safety – Blockchain technology is highly secure as each person who joins the Blockchain network is assigned a distinct character linked to his account. This ensures that the account’s holder is carrying out the transactions. The block cryptography in the chain makes it more difficult for an attacker to disrupt the chain’s conventional setup.
iv. Quicker processing – Before the advent of the blockchain, conventional banking organisations took a long time to process and initiate transactions, but payment frequency increased dramatically with blockchain technology.
Previously, the entire banking process took around 3 days to settle, but with the advent of Blockchain, the time has been reduced to seconds or minutes.
Blockchain’s Disadvantages
i. Power Consumption – The Blockchain consumes a lot of power; in one year, the power consumption of Bitcoin miners on its own would be more than the per capita energy usage of 159 various countries. Maintaining a real-time ledger is among the purposes for this usage because every time something new node is created, it interacts with every other node at the exact moment.
ii. Price – The average price of a Bitcoin transaction is $75-$160, with most of this cost covered by energy usage. There are very few possibilities that we will fix this matter through technological advancement. As another factor, the storage issue, which the energy issues may cover, cannot be settled.
iii. Indeterminate regulatory status – The central government has set up and controls modern cash in every part of the world. It becomes difficult for Bitcoin to gain acceptance by pre-existing financial firms.
The Future
Some of the current limitations of digital currencies, including that a digital fortune can be wiped away by a system crash or that a hacker can ransack a virtual vault, which may be conquered in time by technological advancements. What will be more challenging to overcome is the fundamental paradox that cryptocurrencies face: the more popular they are becoming, the more regulatory oversight and government scrutiny they are likely to face, undermining the basic principle for their presence.
While the number of retailers accepting cryptocurrencies has grown steadily, they remain in the fringe element. Cryptocurrencies must first gain customer perception before they can be widely used. However, their relative sophistication compared to traditional currencies will likely deter most people, except the terms of technology savvy.
A cryptocurrency that aspires to be a part of the mainstream financial system may be required to meet widely disparate criteria. It would have to be mathematically complex (to avoid fraud and hacker attacks), but simple for consumers to understand; decentralised, but with appropriate financing safeguards and protection; and maintain user anonymity without acting as a conduit for tax evasion, money laundering, and other illicit activities.
Given how difficult these criteria are to meet, is it possible that the most popular cryptocurrency in a few years will have characteristics that fall somewhere between heavily-regulated fiat currencies and today’s cryptocurrencies? While that prospect appears remote, there is little doubt that as the leading cryptocurrency at the moment, Bitcoin’s success (or failure) in dealing with the challenges it faces may determine the fortunes of other cryptocurrencies in the years ahead.
Should You Invest in Bitcoin and Other Cryptocurrencies?
If you are thinking about investing in cryptocurrencies, you should approach your “investment” like any other highly speculative venture. In other words, accept the possibility of losing most, if not all, of your investment.
As previously stated, a cryptocurrency has no intrinsic value other than what a buyer is willing to pay for it at any given time. This makes it highly vulnerable to large price swings, increasing the risk of loss for an investor. On April 11, 2013, Bitcoin, for example, fell from $260 to around $130 in six hours. If you can’t handle that kind of volatility, look for other investments that better fit you.
While opinion on the virtues of Bitcoin as an investor remains divided – supporters point to its small quantity and increasing application as value drivers, while detractors saw it as just another massive bubble – this is one discussion that a rational investor might do well to avert.
Bottom Line
The occurrence of Bitcoin has also led to a debate about its and other cryptocurrencies’ future. Despite recent issues, Bitcoin’s achievement since its launch in 2009 has motivated the development of unconventional cryptocurrencies such as Etherium, Dogecoin, and Ripple.
A cryptocurrency that aspires to be a part of the mainstream financial system would have to meet various requirements. While that possibility appears remote, there is little doubt that Bitcoin’s success or failure in dealing with the challenges it faces will significantly impact the fortunes of other cryptocurrencies in the coming years.
KEY TAKEAWAYS
Blockchain is a type of centralised database that varies in different databases in the way it holds data; blockchains store data in frames, which are then linked together using cryptography.
When new data arrives, it is added to a new block. Once the block is filled with data, it is shackled onto the preceding block, resulting in the data being chained together in a sequential sequence.
A blockchain can store various data types, but its most common application to date has been as a ledger of transactions.
In the case of Bitcoin, blockchain is being used in a decentralised manner, so that no single group or person has control—instead, all users retain control collectively.
Because decentralised blockchains are unchanging, the data entered is irreversible. In the case of Bitcoin, this means that all transactions are forever documented and accessible to anyone.
