Before we can really appreciate the advantages of cryptocurrency (or crypto for short), we need to understand exactly how it works. Here’s our brief overview of what cryptocurrency is, the main players and how the platform it runs on makes it so secure.
Daniel Coll, October 5th, 2020
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Join us on a dive into what a cryptocurrency is, why they're so secure, a look at Bitcoin & The Blockchain (good band name) and the potential future of crypto as an industry.
A cryptocurrency is a digital currency that is digitally secure, hosted by a massive peer-to-peer network and galvanised by an electronic security system. There are thousands of cryptocurrencies, and anyone can launch their own. However, the more stable players are Bitcoin, Ethereum and Litecoin, with a host of others gaining traction more recently.
In a practical and democratic sense, giving the individual ownership and creating a network of mutual trust is a major plus-point for cryptocurrency. Cryptocurrencies typically have a finite amount available, bolstering their value and stability. As well as using crypto to pay for good and services, users can receive it as salary or other regular payments.
Cryptocurrency needs to be mined from across the web, meaning that hidden data - that is essentially a currency’s DNA - needs to be meticulously sought out, which takes massive amounts of computing power and therefore is not an option for most individuals.
Bitcoin is founded on mutual trust and runs on highly secure Blockchain technology. It’s a self-fulfilling, endless concept that enables the individual user to become a part of an ownership network.
It was a game-changer gaining many early adopters, with many becoming Bitcoin millionaires - some literally overnight - when the currency soared in value at the end of 2017. It is a super-secure currency, if a little volatile by Fiat (traditional currencies) standards, but it is technically more secure that any traditional currency, with its roots in the digital fortress that is the Blockchain.
As its name suggests, the Blockchain is a chain of blocks each containing encrypted information, all held on a digitally secure platform. It works using timestamps, the brainchild of a group of researchers in the early nineties, designed as an application to timestamp their digital documents to avoid tampering.
The system stayed irrelevant and unheard of for many years, before the team (or lone developer) using the pseudonym Satoshi Nakamoto adapted it for Bitcoin, and the world’s first cryptocurrency was born.
The Blockchain acts as a distributed ledger for cryptocurrencies, unlike its original role as digital notary for the researchers. Open to all, its security comes from the simple fact that once information is recorded into a ‘block’ it is virtually impossible to change without leaving a record of such.
Each block in the chain consists of three main components. These are the data itself, the hash, and the hash of the previous block; together they create the chain. The data that gets stored on the chain will depend completely upon the exact function of the chain, so if it’s a cryptocurrency the block’s data may be transaction data, such as sender and receiver, along with the amount sent and the time of the transaction, etc.
The hash that is associated with each block of data is unique, non-replicable and can be compared to a fingerprint; it’s an electronic ID that identifies the block and its data. The hash is calculated on the creation of a block and its data, any changes made to said data will inevitably change the hash, thus making the tracking of changes easy and rendering anonymous tampering impossible.
Blockchain’s infamous security comes from that third element, the inclusion of the previous block’s hash in every newly created block. Tamper with a block and its hash will change, invalidating all subsequent blocks. This happens because they will no longer have a valid hash from each previous block.
As a safeguard against tampering, Blockchains use a concept known as ‘proof of work’ which slows the creation of new blocks, as hashes on their own are not totally guaranteed to be tamper-free. The process usually takes around ten minutes and is extremely effective in preventing tampering, as to make any changes to one block will also require the proof of work in all previous blocks to be changed, an impossible task that ensures a secure network. It’s this network that’s the key.
The peer-to-peer nature of the Blockchain network requires all other users to accept any new blocks that are created, so any discrepancies will mean a new block is immediately rejected by the network. Therefore, a tampered block and the proofs of work from this and all previous blocks will need accurately changing, with each and every proof of work recreated and all matched in order to be accepted by at least 50% of the network in order to gain active control – simply not possible.
Today’s cryptocurrencies still have a few hurdles to overcome. The biggest of these being the perceived vulnerability of a crypto balance. One computer crash or targeted hack can indeed be the end of a fortune, but these risks are reducing all the time as technology advances and third-party verification partners like Veriff get on board.
Inevitably as crypto gains popularity so does governmental scrutiny and regulation. However, for merchants and customers wishing to use digital currencies, regulation is welcome if it raises consumer confidence in crypto. At present their complexity and relative niche appeal keeps them out of the mainstream, but as tools like Veriff can take the risk factor away by giving merchants peace of mind in relation to knowing the vital details and trustworthiness of the individual user, there seems no reason why the super-secure structure of the Blockchain itself can’t adequately handle the rest.
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