Blockchain has been one of the buzzwords in crypto, but what exactly is it? This article will cover more about this technology and its significance in this industry.
The world of cryptocurrencies is filled with buzzwords — ‘blockchain’ is one of the most prevalent. Blockchain technology is the driving force for the vast majority of digital coins out there. When we speak of cryptocurrencies being decentralized, it is primarily due to the disseminated nature of the blockchain.
Blockchain can not be just limited to the cryptocurrency space since this invention is purely about a more secure, advanced, and efficient data collection method. Hence, it will become a disruptor in many other industries.
This article will explore blockchain in more detail, specifically its integration with cryptocurrencies and why it matters for this niche.
What is the blockchain?
To laypeople, the idea of a blockchain sounds complex when, in reality, it isn’t so. The technical definition refers to an electronically distributed ledger for storing data and transactions.
In its current form, the blockchain is primarily used in the creation of cryptocurrencies. Data is stored in ‘blocks cryptographically and chronologically linked in a growing ‘chain’; hence ‘blockchain.’ Once new data fills a block, it is chained to the previous block and cannot theoretically be modified.
Even if someone wanted to alter one block, they would need to adjust all the hundreds or thousands of blocks before it. Blockchains are often publicly distributed, which is one of the key factors for non-centralized control.
In the specific case of cryptocurrencies, they exist in a programmed peer-to-peer network with a pre-determined protocol that a group of computers cooperatively adhere to.
This protocol governs all the rules to validate new blocks to drastically minimize the chances of tampering or fraud by bad actors in the network. The blocks are records of cryptographic hashes, which are merely mathematical algorithms.
A group of computer owners gather in a blockchain system using highly advanced machines to solve these complex equations. This process is popularly known as mining. Whichever miner or group is first to crack the code has the right to add the next block in the chain and earn a certain reward in the form of a new token.
The role of blockchain in cryptocurrencies
Here, we’ll explore the five key tenets of the blockchain, which most experts agree to be the most crucial.
- Security: Although attacks occasionally happen with cryptocurrencies, they are still extensively secure in nearly all cases. Blockchains achieve security in several methods, though the main one is in how data is stored.
As briefly mentioned, blocks are created in linear and chronological order. To revise one block means you would need to modify all the other blocks before. Once a block has been created, it becomes set in stone.
As a cryptocurrency grows in value or market cap, it becomes extremely expensive to attempt a takeover of an entire network for malicious purposes.
- Decentralization: Independence from a centralized control is one of the defining components of cryptocurrencies in response to the unfavorable power of central banks and governments.
In publicly distributed ledgers, no one party can make any major structural changes on their own. The governance control of any blockchain is often up to the community, securing it rather than a specific person or group.
Public blockchains are often referred to as permissionless since no one requires permission to join them aside from owning the right computer equipment.
- Transparency: Unlike a centralized database, anyone can view all the transactions in a blockchain, creating a reliable level of trust.
- Autonomy: Transactions in blockchains happen autonomously based on pre-programmed rules provided all nodes in the network continuously reach consensus in the formation of blocks.
- Anonymity: Being anonymous is another key factor for any cryptocurrency enthusiast. When joining any blockchain, no personal information is required or exposed.
The significance of the blockchain in cryptocurrencies
While the concept of something resembling the blockchain stretches back to the early 1980s, Bitcoin is the first project to practically and successfully implement the idea in 2009. Bitcoin’s mysterious founder, Satoshi Nakomoto, envisioned creating a decentralized digital currency free from the central bank and government control.
However, they needed a security system to keep an accurate record of transactions without falsification that would naturally persist in a non-centralized network. This is where the blockchain was introduced and has since, for the most part, worked efficiently.
Although other methods of creating new tokens exist, most notably the proof-of-stake model, the blockchain laid the foundation. The significance of the blockchain has been explored in the previous section, but below, we can summarise the main points.
- Decentralization means no central bank or government has any influence on the currency. In many ways, cryptocurrencies have provided some financial freedom that is harder to experience with fiat money.
- Having a transparent system provides a level of trust and clarity that is largely lacking with fiat currencies due to authoritarian control.
- Autonomy is merely about scalability and relying less on physical means of creating and transferring money.
- Although not all coins are entirely anonymous, most do have some considerable level of anonymity without the requirement of sensitive personal information, as is often the case with the traditional financial system.
One misconception with the blockchain is that the technology only applies to cryptocurrencies. The internet gave birth to emails but not long after provided a seemingly infinite number of use cases that we now enjoy.
Similarly, blockchain is already moving in a similar trajectory. We should begin to see more of its applications in a myriad of things like research, supply chain management, voting, fundraising, tracking, banking, ownership, identity processes, and much more.
Presently, it’s hard to deny the blockchain is heavily utilized in cryptocurrencies, to which it has been revolutionary. It may have been a different experience having digital currencies operating so efficiently as they presently do without it.