The world of cryptocurrencies is a complicated one. Although it’s become simpler to put money into it over the years, the underlying technology behind it all has only become more and more complicated. As hard as that makes it to get your head around though, as you’ll come to understand, that is actually a good thing.
Whether you’re simply looking to invest in bitcoin, trade some Ethereum, or are intrigued about what comes next for the blockchain, we’re going to help explain it to you. In this guide, we’ll help answer the core question at the heart of the cryptocurrency world: what is a blockchain?
Back to the genesis block
The first work on the technology began back in the early ’90s in a paper entitled “How to Time-Stamp a Digital Document.” It was the very rudimentary idea of what the blockchain would eventually become, but it was the beginning of something that would spawn industries worth hundreds of billions of dollars and could very well reinvent many aspects of how our digital society operates.
Although you may associate blockchain technology specifically with cryptocurrencies like bitcoin, it’s just as related to cryptography as it is to digital currencies. Blockchains utilize the mathematical securing technique to legitimize a record, confirming its authenticity. The blockchain is a growing chain of these records, or “blocks,” that allows for a confirmed trail back to the original block that’s heavily resistant to modification and tampering.
That chain begins at the “genesis block,” the very first record in that chain and continues unbroken through successive blocks. Each of them is proven through the use of cryptographic hash pointers, which link it with the previous block in the chain and prove its validity. They also contain a timestamp and transaction data, thereby offering the same function as a traditional middle-man institution but with public rather than private oversight.
A more colloquial description of it is that it’s effectively a ledger that notes down the details of a transaction. What makes a blockchain different from more traditional ledgers is that it’s entirely peer-to-peer and therefore unbiased and requires the time investment of the community involved in its usage, rather than a dedicated middleman.
That’s what makes the blockchain such an effective backbone for cryptocurrencies, which is where it made its first practical appearance in the creation of bitcoin in 2009. Developed by the still effectively anonymous “Satoshi Nakamoto,” the cryptocurrency allowed for a method of conducting transactions, effectively acting like an entirely digital currency, but protected from interference by the use of the blockchain.
Bitcoin and the alt-coins
Although bitcoin and the alternative currencies all utilize blockchain technology, they do so in differing manners. Since bitcoin was first invented it has undergone a few changes at the behest of its core developers and the wider community, and other alt-coins have been created to improve upon bitcoin, operating in slightly different ways.
In the case of bitcoin, a new block in its blockchain is created roughly every ten minutes. That block verifies and records, or “certifies” new transactions that have taken place. In order for that to happen, “miners” utilize powerful computing hardware to provide a proof-of-work — a calculation that effectively creates a number which verifies the block and the transactions it contains. Several of those confirmations must be received before a bitcoin transaction can be considered effectively complete, even if technically the actual bitcoin is transferred near-instantaneously.
This is where bitcoin has run into problems in recent months. As the number of bitcoin transactions increases, the relatively-hard 10-minute block creation time means that it can take longer to confirm all of the transactions and backlogs can occur.
With certain alt-coins, that’s a little different. With Litecoin it’s more like two and a half minutes, while with Ethereum the block time is just 10-20 seconds, so confirmations tend to happen far faster. There are obvious benefits of such a change, though by having blocks generate at a faster rate there is a greater chance of errors occurring. If 51 percent of computers working on the blockchain record an error, it becomes near-permanent, and generating faster blocks means fewer systems working on them.
As much as blockchain technology has facilitated the creation of cryptocurrencies which have themselves had a considerable impact on a large number of institutions and industries, the blockchain itself has much greater potential. Its ability to secure trust in a digital commodity, to effectively make something that is infinitely reproducible, unique, has wide-reaching implications. It confirms a transaction in a manner that is both verified and publicly verifiable. Until now that’s not been possible at the speed and ease that the blockchain allows.
In comparison, traditional financial institutions operate at a snail’s pace and are far less compatible with public oversight. There is much less interoperability within financial systems and that’s why global financial transactions can be so time-consuming and prone to error.
Blockchain technology could theoretically make traditional accounting practices redundant, allowing for all financial transactions to be publicly viewable, thereby immune to cooking the books. Its decentralized nature could mean borrowing money from pools of peers rather than financial institutions or make it possible to confirm credit card transactions to altogether eliminate fraud.
Technologies currently being tested with cryptocurrencies, like smart-contracts, could mean the need to do away with costly lawyer fees or complicated contracts to guarantee a service or item is received in return for payment. Buying and selling houses could do away with estate agents and the aforementioned legal experts entirely if we knew the blockchain would confirm all aspects of our transactions.
At its core, blockchain technology spreads the responsibility for making sure something happens as intended to all of those involved in the system. It eliminates middle-men by creating a lot more of them. It has its detractors, but the blockchain has a very exciting future, whether you’re investing in cryptocurrencies or not.