Cryptocurrency markets seem unstoppable at the moment, with new and established products growing 24/7. The blockchain lies at the heart of this relentless development, which is challenging traditional banking infrastructure and offering exciting new opportunities.
But what is the blockchain and why is it so crucial to the direction of economic development? Let's explore more and answer some fundamental questions to build a deeper understanding of how the crypto-economy functions.
At its simplest, a blockchain is a shared ledger which records transactions and tracks assets while building trust among users by making every operation transparent.
Most blockchains function as distributed databases that are shared by several nodes in a computer network. As a database, it stores electronic information in encrypted form that is virtually incorruptible.
When changes are made to this database, the whole distributed chain is updated so that the information presented to the users is always accurate and up to date. This allows the blockchain to act as a real-time economic ledger that stores encoded data of financial transactions. But it can be used to store other data as well.
A key fact is that no one person owns a blockchain. As mentioned before, it runs on interconnected computers. Multiple nodes host a blockchain simultaneously, and anyone with an internet connection can access its data.
In economic terms, the idea behind the blockchain is to enable transactions with less friction and more trust between sellers and buyers. This concept was first described in 1991 by Stuart Haber and Scott Stronetta, who sought a practical solution for time-stamping digital documents such as orders and invoices.
In 2004, Hal Finney introduced the concept of Reusable Proof of Work (RPoW), which developed into the digital cash we know today. RPoW later developed into RSA-signed tokens that one could transfer to other people, solving the problem of double-spending.
Later in 2008, Satoshi Nakamoto developed the concept of a distributed blockchain that allowed the addition of blocks to an original chain without needing signatures of the trusted parties.
This liberated the technology to function as a currency delivery system, and it now forms the backbone of the cryptocurrency sector.
A blockchain consists of different components which combine to keep the system running. These include:
A standard blockchain consists of transactions (or changes) and blocks. Each block has a cryptographic hash that is unique and links them to the previous change. Every block also has a storage capacity, which, when closes when filled and is linked to the previous filled block.
All participants on the blockchain can see the block, and they can verify or reject changes. The entries from these changes are recorded into the block as a ledger and secured by cryptographic technology.
Blockchains can record all sorts of information, but transactions are the most common, and Bitcoin is their most famous application. When a transaction happens:
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Blockchains revolutionized the field of finance, with a range of potential benefits. Most importantly, blockchain-based currencies are seen to be more secure than storing cash digitally and physically.
Consider a case where a hacker wants to hack into Bitcoin and steal some crypto. Once they alter their own copy of the blockchain ledger, it becomes different from the copies in other nodes.
As a result, the hacker stands out during the cross-referencing of entries, which raises an alarm in the cybersecurity network of the chain. That's a big plus for banks, insurance companies, and individuals sending money to each other. But there are other advantages, too:
However, we need to be realistic. Blockchains also come with some negatives. For instance:
Blockchain is the foundation of the cryptocurrency world, providing a safe, secure, and transparent record of all transactions.
As we've seen, this technology has huge potential, with cybersecurity advantages, transparency and efficiency benefits. And this has also meant that a huge tech industry has arisen to build crypto apps and infrastructure.
Whether you want to know more about crypto to inform investments or you're keen on coding in the sector, Ironhack's bootcamps can help. We're on the cutting edge of tech, so get in touch and book a course today. It's an exciting area, with so much to discover.
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