Technology

The ultimate guide to understanding Blockchain and the concept of cryptocurrency

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Written by Yusuf

Throughout the evolution of mankind, money is an essential commodity that has always played an important role in the exchange of goods and services among human beings. Right from providing comfort and amenities, money can finance your dreams, ambitions, projects and passions. Do you remember the ancient times when the barter system existed (where goods and services were directly exchanged for other goods and services)? And there was the time when the ancient Egyptians used ring money made out of bronze, copper or gold. Until the invention of paper money, people used money in different forms. Thus money has played a vital role in various civilizations across the globe.

The modern times have seen the growth of economic exchange using paper money which further led to the development of banks, cheque-payments and money transfer. With this evolving nature of money, we have now entered the horizon of internet money. The term Bitcoin comes into play at this point as it is the most talked about digital/cryptocurrency.

What is Cryptocurrency?
Cryptocurrency refers to a digital cash system without a central entity. Like a peer-to-peer network for file sharing, cryptocurrency is a medium of exchange just like government-issued currencies. To exchange and hold this digital cash, you need a payment network with accounts, balances and transaction. This digital currency known as cryptocurrency uses cryptography to secure the transactions and to control the creation of new units. The process involves converting legible information into an almost uncrackable code, to track purchases and transfers and that’s how the transactions are secured. The first cryptocurrency Bitcoin was created in 2009 and is still the best known digital currency.

Today, many things in the world are progressing towards the digital route, so is our money. While some people believe that it is strengthening our personal and financial economies, others still do not believe in the magical powers of this volatile currency. But one thing is for sure that the crypto-monetary system has already started building up. Like traditional currencies which we use as a medium of exchange and express value in units, the same is the case with cryptocurrencies. For instance, you can say “I have 2.5 Bitcoin,” just as you’d say, “I have $2.50.”

What is Bitcoin?

Bitcoin is a digital currency that was created in 2009. When using Bitcoin, transactions are made without the banks acting as the intermediate authorities. Bitcoin has no physical presence and these days people use it as an investment, hoping that these magical coins will go up in value. Since the currency is decentralized, the production can be done by individuals, companies and organizations using a software that solves mathematical problems. Created by an anonymous founder under the alias Satoshi Nakamoto, Bitcoin is the world’s first cryptocurrency. While there are other cryptocurrencies as well in the market, but most of them are variations on Bitcoin, the first widely used cryptocurrency.

The idea behind making cryptocurrencies was initially to provide peer-to-peer networking which has now evolved into digital transactions with a massive public ledger. In the case of Bitcoin, the program running the network is known as blockchain. A digital transaction between two peers upon confirmation is made available for public on the ledger. With the help of cryptocurrency techniques, this transaction is authenticated and using “digital wallets” one can now spend online with a set minimum balance amount.

Bitcoin is the ownership of an entity which can be transferred to others at will. The process of transfer is taken care by Digital Signing Algorithm ECDSA. It involves the initiation of transfer from one party, signing and confirming the transfer by the sender and verification by the third party who can then verify the authenticity of the sender’s signature using the combination of public key and signature generated using the private key. Only the signer retains the exclusive ability to create the signature upon receiving the transfer. The data is signed by the purchaser to authenticate that he or she has purchased the bitcoin.

How Does Cryptocurrency Work?


The cryptocurrency is an attractive and potentially profitable investment which provides a feasible method of issuing and tracking ownership of each unit.
People can buy and trade cryptocurrencies on the exchanges. Just like you need a bank account to trade stocks, it all starts with setting up a bank account and verifying your details. After verifying the account, the user can add a number of payment methods including credit and debit cards. Once you have successfully created your account, you can conveniently buy and store your cryptocurrency on the platform and conduct instant transfers.

Cryptocurrency transactions are not anonymous and each individual unit acts like a piece of data that can be well traced throughout the network of participants which means that the identity of the currency owner can be traced back. This form of virtual currency is treated as a property for the investors. The value of Bitcoin ranges from as small as $0.01 USD m to as big as $1 Billion USD. While some cryptocurrencies are managed by a single entity other are controlled by the public. This means that some cryptocurrencies are centralized whereas others are decentralized.

Cryptocurrencies use various time-stamping schemes to ensure the security of their transactions. Bitcoin, the most popular cryptocurrency, uses a proof-of-work scheme, which is also known as mining to authenticate every transaction in history. This prevents double spending and counterfeiting. There are a handful of alternative approaches used by other cryptocurrencies to achieve the same result. These approaches are often labelled Consensus Protocols or Consensus Platforms. That efficiently validate cryptocurrency transactions.

Why is Bitcoin working?
Why use bitcoin? Here are 10 good reasons why it’s worth taking the time to get involved in this virtual currency.

It’s fast
There is no denying the fact that cryptocurrency has the potential to alter the course of history in the banking sphere, particularly how we transact and transfer money. One of the reasons why Bitcoin has achieved popularity is due to its far faster transactions. Let us take you to a real-life scenario when you visit the bank to deposit a cheque from another bank and the bank will often hold that money for several days, because it first needs to authenticate the bank’s financial system and ensure that the funds are really available. Similarly, international wire transfers can take a relatively long time but Bitcoin transactions are generally faster.

It’s cheap
Out of the many benefits for customers and merchants, Bitcoin transaction fee is an attractive one. Unlike credit card transactions where your merchant (and possibly you) pay for the privilege, Bitcoin transaction fees are minimal, and in some cases free which makes it an attractive option to utilize bitcoin. This minimal fee is there for obvious reasons. The larger the transaction data size, the longer and more energy it will take for miners to validate the data. Thus a minimal fee is charged for the same.

Central governments can’t take it away
Bitcoin is a peer to peer payment system that allows users to transfer value without any central authority involved. Hence the currency is decentralized and you own it completely. Rather there is a network of anonymous miners who are in charge of processing the transactions but no central authority has control over your Bitcoin assets a bank can’t take it away from you. For those who find their trust in the traditional banking system unravelling, the automated issuance feature of bitcoin can be a big benefit.

What is Blockchain?


Best recognized as the technology behind cryptocurrencies such as Bitcoin, the blockchain is a digitized, decentralized, public ledger of cryptocurrency transactions that is incorruptible. The scale of adoption of the blockchain technologies is worth a mention it ensures transparency in the system. It successfully records every transaction in its database. Using blockchain technology, all completed blocks (recent transactions) are recorded and added in a chronological manner. Originally devised for the digital currency, Bitcoin, the tech community is now growing and they are appearing in a variety of commercial applications today.

A technology which is primarily used to verify transactions, Blockchain truly is a phenomenon which could mean a boon to the industry, as it can tackle the issues of financial corruption. There is no need to worry anymore about missed transactions, human or machine errors, and no exchange can take place without the consent of the parties involved. What you get is verified transactions with a guaranteed validity. Above anything else, this is one of the most critical areas where Blockchain helps. The Blockchain technology is opening up a chain of new solutions for those who want to witness a transparency in the financial system of the nation. Every single transaction is recorded not only on a main register but also on a connected distributed system of registers. These registers are in turn assisted by a secure validation mechanism.

What are the Best Cryptocurrencies?
You have often heard about blockchain technologies and cryptocurrencies. Bitcoin is probably the first most visible application of blockchain and the first cryptocurrency to arrive. Having proved the feasibility of cryptographic-backed money supply, Bitcoin is the first alternative to fiat currencies. This virtual currency is open to everyone and anybody can invest in Bitcoin. There are close to 1,000 different types of cryptocurrencies currently available on the exchange platform, where Bitcoin is currently the most popular currency which is starting to get on the radar of more people from the market capitalization point of view.

Just as Bitcoin has become popular owing to its rapid gains in value, different cryptocurrencies claim to play a different role and provide different benefits over others. Some cryptocurrencies such as Litecoin are known to be better than Bitcoin owing to faster confirmation times.
Newer cryptocurrency such as ether, based on the Etherum blockchain is the new rival digital coin for Bitcoin. In short, Ethereum is a platform which records transactions in a manner such that it is very difficult to manipulate and change records. Ethereum uses smart contracts to facilitate the exchange of value on its platform. This open source blockchain platform records information chronologically and publicly.
While awareness about the types of cryptocurrencies can fuel investment in the sector, but it is important to choose the best cryptocurrency that fits your specific need.

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Yusuf

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