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In the intricate, advanced, and (if you will excuse me) cryptic, a world of cryptocurrencies and virtual currencies, the blockchain is the foundation. Having said that, while we are by no means closer to understanding what the blockchain really is, we have the basic principle down. To build a concept, however, without getting to know the blockchain is making a roof without walls; it’ll get you through the easy parts but the rain comes and it’ll all come crashing down on your head.
If you feel perplexed by the whole concept, don’t worry. Relax, grab some popcorn, and let’s start.
‘Blockchain’ is a term used to describe the data store at the heart of every cryptocurrency; that heart, of course, being figurative and omnipresent. We will expound upon that later, but for now, let’s lay down three key points of the blockchain.
What Makes the Blockchain Special?
- It is an “open ledger”. No doubt you’ve heard that phrase bandied about ad nauseum but it’s really the aptest way to describe the security yet transparency behind the idea.
- It is peer-to-peer, eliminating any and all third party reliance. With reference to the context, that means banks and other service providers like payment card services get cut out of the picture.
- It is immutable, i.e. it cannot be changed or altered in any way after it has been updated.
Why Was the Blockchain Introduced?
A series of simple answers come to mind. While cryptocurrencies have, by loose definition, existed for a while before Bitcoin, they were primitive and suffered from a few key issues:
- Most cryptocurrencies had a ‘double spending’ problem. This is simplest explained ahead.
- The cryptocurrencies were not remotely secure due to cybercrime and a lack of any authority.
- There was no trust between users and few could invest safely in it at all.
To the first issue, s brief explanation is owed. Go back to first-grade Mathematics problems; let’s say Tommy has 10 apples, and he gives 5 to his friend Timmy. If Timmy now has “x” apples, solve for “x”.
In order for logic to prevail, Tommy must have 5 apples left by definition, or the equation x= 10-5 is invalid.
In the same way, whenever someone buys anything or happens to lose money in any way, it is necessary that the total sum lost be subtracted from their resources. With fiat currency, this process is simplistic to the point of self-fulfilling, but in crypto, this becomes a problem, when users don’t lose money, but can still give it away. This is called the “double spend” problem in economics, and if left unchecked can lead to serious inflation, and devaluation of a currency.
Moreover, there was always the risk of losing one’s data, in this case, assets, due to online hacking. People were afraid that one day they would awaken to find themselves completely bankrupt; it even happened to an online company in 2012 called Mt. Gox, which reported in 2012 that it had suddenly lost around 850,000 Bitcoins, which was almost half a billion dollars at the time. At the same time, due to its young nature, few could trust the new system. And how banks work is essentially through trust; nobody would use them if they knew they could be cheated of their money. So as far as their usefulness was concerned, cryptocurrency seemed like a long shot.
How Did Blockchain Solve These Issues?
In 2008, Bitcoin was introduced as a cryptocurrency, along with a revolutionary piece of ingenuity, the blockchain.
The blockchain is a compound word and both of the two words it is made up of has a contextual meaning. Let’s describe how it works to understand why this term was coined.
The blockchain is called an open ledger because it is a summary of all transactions done in a single cryptocurrency that can be viewed by all but cannot be altered. This unchangeable nature is referred to as its being immutable. This means that the ledger can be updated, yes, but previously written pieces cannot be changed in any way. Why is this so? Let’s explain the blockchain.
You see, as a book is made of pages containing paragraphs containing words, so too is the blockchain made of files called blocks. Each block contains, in essence, the history of the entire cryptocurrency transactions. And these blocks are linked systematically in a series of records, that when amalgamated, forms our ‘chain’ of ‘blocks’, i.e., our blockchain.
The thing is, these blockchains can be updated as frequently as every ten minutes, and once this is done, the records become immutable, not because one person like an admin has a master copy or something; but because everyone has a copy that must agree. Every time a transaction is made on the network, a group of people (called ‘miners’) compete to verify the transaction (to avoid the aforementioned double spending problem), encrypt the data, and to upload it to the blockchain. When one miner wins, he or she can get paid, usually in Bitcoin. Then everyone else has to update their ledger with the added transaction and wait for the next transaction, for a chance to win the competition the next time. If they don’t update it, they won’t be able to participate in the next ‘round’.
So, this is how the blockchain is maintained by the community, upheld by the community and protected by the community. Even if someone wanted to hack the system, they would find it virtually impossible. In order to do this, they would have to break through the highest levels of encryption on all previous files on the blockchain, alter them to make logical sense, on every single computer that has a copy of the blockchain, at the same time. Keeping in mind that the computing power of cryptocurrency services can be up to a million times more than that of Google, it’s safe to say that cryptocurrency is extremely secure.
This makes the trust in blockchain in the world of e-finance. It is easy, quick and cheaper as it cuts out the middleman and costs much less than a standard bank transfer.
Now you know how the blockchain works, you should really try to get in on it as soon as possible. Try buying Bitcoin with a visa credit card and see how the blockchain can secure your transactions today. If you’re looking to invest and want to be able to use a virtual debit card, look no further than the Amon card, with its unique and innovative A.I. that makes it one of the best cards on the market.
If you want to find out more on Bitcoin and blockchain technology, look it up here.