Now that Bitcoin prices have skyrocketed beyond all expectations and altcoins have proven their worth as well, we’ve seen an unprecedented surge in interest and investment into cryptocurrency markets.
The influx of new money to the space is exciting, but how many of these investors understand the technology that powers cryptocurrency?
This technology is known as blockchain, and it’s vitally important to understand how it works – at least on a fundamental level – if you plan to get involved in crypto markets.
Today, we’re giving you the must-know info on blockchain technology so that you can better navigate the crypto labyrinth, understand key news items, and make better investments moving forward. Of course, there’s always more to learn, but this article will be your starting point!
Blockchain Basics
First, we’ll lay out some key terms and concepts so that you can grasp the basics of blockchain before we get into more advanced ideas like coins, tokens, mining, and more.
The Ultimate Digital Ledger
The best way to conceive of blockchain is a massive, decentralized database of transactions – a database of information that is constantly being built, expanded, validated, and secured.
More specifically, the name is derived from a sequence of blocks – groups of transactions distributed across a network of users – that are chained together to form a complete whole.
This chain of blocks is not a language, not a type of code, nor a file stored on a single hard drive in a computer. It is an expansive database across a vast network and can be used for specific purposes.
Of course, the most common purpose of blockchain right now is to facilitate transactions via cryptocurrency, but we’ll touch more on that later.
For now, try to visualize blockchain as the ultimate digital ledger, storing large amounts of information in blocks that build on one another to create a decentralized timeline of data.
Immutable, Incorruptible, Secure
To better understand blockchain, it helps to recognize the benefits it provides over standard database technology, which is fundamentally constructed and operated differently.
First of all, blockchain storage is immutable, meaning that once a block of information has been secured and legitimized, it cannot be altered or manipulated in any way. This is a core distinction from normal databases, which can always be changed if a user has the necessary permissions.
Another key advantage of blockchain technology is that it’s incorruptible, meaning that no outside source can hack into the system and destroy the work that has already been done. Many have tried, of course, but due to the decentralized nature of the database, it’s impossible.
This leads to our next key point about blockchain, which is its unparalleled security. Whether you’re performing financial transactions via Bitcoin, voting in democratic elections, or developing any critical application, blockchain is a highly secure database that will keep your information safe at all costs.
Considering that cyberattacks and identity fraud incidents are at all-time highs (and continuing to rise), the security angle of blockchain is a big part of its appeal.
Applications and Uses
Cryptocurrency is the most popular and successful use case for blockchain technology so far. Still, engineers and developers anticipate many more blockchain applications as it sees more widespread adoption and support.
We already see NFT (non-fungible token) marketplaces emerge on blockchain platforms, giving exclusive rights to digital art pieces or items for virtual worlds like video games.
Numerous blockchain projects are being built to secure medical data, bolster personal security online, improve supply chain and logistics monitoring, and even track music royalties so that artists are paid fairly for streams on various platforms across the web.
In other words, blockchain has only just begun its ascension to the top of the tech world, and we’re here to watch it happen in real-time.
Bitcoin and Blockchain
We often hear the terms Bitcoin and blockchain used in the same sentence, and these things are indeed closely related. They are not the same, however, so let’s explain the connection now.
The Original Cryptocurrency
Bitcoin is considered the first cryptocurrency, and after many years on the fringes, it is now in the spotlight of retail and institutional investors worldwide.
That’s because Bitcoin is the most widespread and successful application of blockchain technology to date and has rightfully earned its title of digital gold.
Blockchain vs. Banks
Bitcoin implements blockchain technology to gain several key advantages over the conventional banking system to which we all ascribe. Here are some ways in which Bitcoin has the edge over your typical regional or mega-bank:
- Better security and privacy
- Always open (24/7)
- Lower transaction fees
- Higher transaction speeds
- Cannot be seized or tracked
These reasons alone make Bitcoin – and other cryptocurrencies – a very appealing asset to the next generation of investors. It’s all a testament to the strength and versatility of blockchain technology, and once again, this is just the beginning.
Altcoins and Tokens
While Bitcoin might retain the title of the original blockchain coin that kicked off the crypto craze, more than 5,000 other coins and tokens have appeared on the marketplace since the introduction of Bitcoin more than a decade ago.
Newly created blockchains have particular coins associated with the technology, as we’ve seen with assets like Litecoin and Ethereum.
Alternatively, tokens can be created on existing blockchain ledgers, opening up opportunities for new currencies to be produced every day and for unique purposes.
Blockchain and Mining – The Connection
You might be aware that Bitcoin and other cryptocurrencies must be “mined” before entering the marketplace. Here’s how blockchain mining works and how new coins are minted.
Decryption Proves Validity
As we said earlier, the blockchain database is constantly growing, expanding, and getting stronger.
This happens through crypto mining, which is another word for validating and securing transactions, then adding them to the blockchain to be stored.
Essentially, new blocks are constructed when users perform highly complex computations to solve cryptographic equations and validate new transactions.
Inputs are converted to hash functions, and they cannot go in the other direction – it’s a one-way street that can’t be reversed.
Furthermore, these equations become more complex and difficult to solve as the blockchain grows, meaning more computing power is necessary to earn cryptocurrency as a reward for making these conversions.
Experts predict that the final Bitcoin will be mined by 2140, meaning that a lot of work must be done to earn a relatively small amount of cryptocurrency. This is considered another advantage of the blockchain system since the database becomes bigger and stronger with every minute.
Energy, Resources, and More
Mining crypto and building the blockchain is a labor-intensive process from a computing standpoint.
Miners use CPUs, graphics cards, and specially-designed units called ASICs to solve these increasingly complex equations for the digital ledger.
As energy costs rise, mining operations will seek more efficient ways to earn crypto with improved technology and creative energy production methods.
Keep a close eye on renewable energy mining practices as cryptocurrency continues its rise, and more investors enter the space.
Conclusion
The blockchain isn’t easy to understand, but hopefully, this article clarified some key points, giving you the knowledge you need to make smart investments and turn profits.
Sources:
Blockchain for Dummies | Medium
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