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Introducing Blockchain and Cryptocurrency

, (Hermanto)

What is a Blockchain?

Before we get to know deeper about blockchain, we need to have a good understanding of what is blockchain first.

Blockchain, sometimes referred to as Distributed Ledger Technology (DLT), makes the history of any digital asset unalterable and transparent through the use of decentralization and cryptographic hashing. It is a distributed software network that functions both as a digital ledger and a mechanism enabling the secure transfer of assets without an intermediary. Just as the internet is a technology that facilitates the digital flow of information, blockchain is a technology that facilitates the digital exchange of units of value. Anything from currencies to land titles to votes can be tokenized, stored, and exchanged on a blockchain network. By inherent design, the data on a blockchain is unable to be modified, which makes it a legitimate disruptor for industries like payments, cybersecurity and healthcare.

The ledger file is not stored in a central entity server, like a bank, or in a single data center. It is distributed across the world via a network of private computers that are both storing data and executing computations. Each of these computers represents a “node” of the blockchain network and has a copy of the ledger file.

Because of the decentralized nature of Bitcoin’s blockchain, all transactions can be transparently viewed by either having a personal node or by using blockchain explorers that allow anyone to see transactions occurring live. Each node has its own copy of the chain that gets updated as fresh blocks are confirmed and added. This means that if you wanted to, you could track Bitcoin wherever it goes.  

Cryptocurrency

A cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services, but uses an online ledger(blockchain) with strong cryptography to secure online transactions. 

More than 6,700 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate, raising money through initial coin offerings, or ICOs.

Let’s have a simple example of how cryptocurrency works. If Simon wants to send bitcoins to Lucy, he broadcasts a message to the network that says the amount of bitcoin in his account should be extracted by 5 BTC, and the amount in Lucy’s account should increase by 5 BTC. Each node in the network will receive the message and apply the requested transaction to its copy of the ledger, updating the account balances.

Advantages and Disadvantages of Cryptocurrency

Advantages

Cryptocurrencies hold the promise of making it easier to transfer funds directly between two parties, without the need for a trusted third party like a bank or credit card company. These transfers are instead secured by the use of public keys and private keys and different forms of incentive systems, like Proof of Work or Proof of Stake.

In modern cryptocurrency systems, a user’s “wallet,” or account address, has a public key, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, allowing users to avoid the steep fees charged by banks and financial institutions for wire transfers. 

Disadvantages 

The semi-anonymous nature of cryptocurrency transactions makes them well-suited for a host of illegal activities, such as money laundering and tax evasion. However, cryptocurrency advocates often highly value their anonymity, citing benefits of privacy like protection for whistleblowers or activists living under repressive governments. Some cryptocurrencies are more private than others. 

Bitcoin, for instance, is a relatively poor choice for conducting illegal business online, since the forensic analysis of the Bitcoin blockchain has helped authorities arrest and prosecute criminals. More privacy-oriented coins do exist, however, such as Dash, Monero, or ZCash, which are far more difficult to trace.

Bitcoin

The first blockchain-based cryptocurrency was Bitcoin, which still remains the most popular and most valuable. Today, there are thousands of alternate cryptocurrencies with various functions and specifications. Some of these are clones of Bitcoin, while others are new currencies that were built from scratch, offering different technologies and fundamentals. 

So in definition, Bitcoin (₿)  is a cryptocurrency invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. Bitcoins are created as a reward for a process known as mining ( we will define this later ). They can be exchanged for other currencies, products, and services, but the real-world value of the coins is extremely volatile

How does it work?

Blockchain consists of three important concepts: blocks, nodes and miners.

Blocks

Every chain consists of multiple blocks and each block has three basic elements:

  1. The data in the block.
  2. A 32-bit whole number called a nonce. The nonce is randomly generated when a block is created, which then generates a block header hash. 
  3. The hash is a 256-bit number wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).

When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined. 

Miners

Miners create new blocks on the chain through a process called mining.

In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn’t easy, especially on large chains.

Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the “golden nonce” and their block is added to the chain. 

Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it’s extremely difficult to manipulate blockchain technology. Think of it as “safety in math” since finding golden nonces requires an enormous amount of time and computing power.

When a block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially.

Nodes

One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning. 

Every node has its own copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.

Combining public information with a system of checks-and-balances helps the blockchain maintain integrity and creates trust among users. Essentially, blockchains can be thought of as the scalability of trust via technology.

Why is there so much hype around blockchain technology?

Cryptocurrencies appeal to their supporters for a variety of reasons. Here are some of the most popular:

  • Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable
  • Some supporters like the fact that cryptocurrency removes central banks from managing the money supply, since over time these banks tend to reduce the value of money via inflation
  • Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems
  • Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money

A QUICK OVERVIEW 

  1. A blockchain is a database that stores encrypted blocks of data then chains them together to form a chronological single-source-of-truth for the data
  2. Digital assets are distributed instead of copied or transferred, creating an immutable record of an asset
  3. The asset is decentralized, allowing full real-time access and transparency to the public
  4. A transparent ledger of changes preserves integrity of the document, which creates trust in the asset.
  5. Blockchain’s inherent security measures and public ledger make it a prime technology for almost every single sector

NFT – Non-Fungible Token

One of the other blockchain uses is NFT or Non Fungible Token. NFTs are virtual items created on a blockchain—often used to certify unique ownership of a digital asset that could be anything from art, music, games, to sports trading cards. 

On why NFTs are getting more and more popular lately, crypto art investors say it’s a combination of several factors, including the pandemic, as well as the rise in bitcoin prices. In the past few months crypto artists have been getting more attention than ever before to NFT marketplaces with flashy sales. As faith in the US dollar seems to be at an all-time low, NFTs could be another way for people to invest.

How do NFTs work?

Non Fungible tokens prove ownership of a digital item – image, sound file or text – in the same way that people own crypto coins.

Unlike crypto coins, which are identical and worth the same, NFTs are unique. An NFT is worth what someone is willing to pay for it, which can be a lot if the NFT is made by a famous artist and the buyer is a wealthy collector.

When someone buys an NFT they gain the rights to the unique token, but only on the blockchain. If someone buys an image or meme, they can own it on the blockchain, but they have no control over rights to its distribution.

When you buy an NFT in most cases you’re not buying the content, but rather a token that connects your name with the creator’s art on the blockchain. It is more like a certificate of authenticity of an item.

However, the digital tokens operate on the same deflationary principles as bitcoin.  NFTs cannot be duplicated, can be easily authenticated, and are immutable, but there’s no sure way to know if they will maintain their value over time.