Explanations for beginners — do not be afraid of Blockchain or Tangle
At the beginning of this year I would like to write a little basics article for the newcomers. Of cause everyone sends e-mails today and reads What’s App messages. This is everyday life and only a few people are worry about it. The banking transactions are handled by many people online and PayPal is of course used by them. In this digital everyday life, cryptocurrencies are now mixed and many people are frightened of it. This is just for tech nerds, some of them say. Nevertheless, in the year before last, there was the crypto-hype and many were annoyed not to have been involved. All the greater was the glee of those because of the correction of Bitcoin and Co last year. “We’ve always known that …” they said. Cryptocurrencies need to regain their self-confidence and with this article, like many before me, I want to create some basics about cryptocurrencies.
What are cryptocurrencies?
Technically, the idea of an electronic peer-to-peer currency was considered decades ago, but it was only in 2008, when Bitcoin was invented, that it was really successful. The foundation for the emergence of Bitcoin and all the virtual currencies that have followed since then was to fix a number of bugs that have been observed in the way money is transferred from one page to another.
Which Bugs? Well, think, for example, how long it takes for a bank to handle a transnational payment, or how financial institutions charge fees by acting as brokers for third parties in transactions. Crypto currencies operate outside the traditional financial system, most of them using blockchain technology.
What is Blockchain?
Blockchain is the digital rules book that stores all virtual currency transactions. When you buy Bitcoin, sell Bitcoin or use Bitcoin to buy a product or service, this process is recorded in encrypted form in this digital book. The same applies to other crypto currencies.
Blockchain technology can be understood as an infrastructure based on virtual currencies. It is the foundation of the house, while the connected virtual coin represents all products that are built on this foundation.
Blockchain offers a number of benefits, but is designed to address three major issues with the current remittance system.
First, the blockchain technology is decentralized. In simple terms, this means that there is no data center in which all transaction data is stored. Instead, the data from this digital book is stored on hard drives and servers around the globe. The reason for this is twofold:
- It ensures that no person or company has a central authority over a virtual currency, and
- It serves as protection against cyber attacks, so that criminals are unable to take control of a crypto Currency and exploit its holders.
Second, as already mentioned, there is no middleman with blockchain technology. Since there is no need for a third party bank to monitor these transactions, transaction fees are likely to drop significantly.
Ultimately, transactions can be handled faster in blockchain networks. Banks have fairly rigid working hours and are closed at least one or two days a week. And, as already mentioned, transactions abroad can take several days. With Blockchain, this review of transactions is ongoing.
You may wonder how these blockchain transactions are verified. Finally, it is also about logistics, e.g. because the same virtual coin is not spent twice. Often, this review falls on a group of people known as miners.
Cryptocurrency Miners are nothing more than people with powerful computers competing with other people with powerful computers to solve complex mathematical equations. These equations are a product of encryption designed to protect the transaction data in the digital book.
The first miner who solves these equations and reviews the transactions on the ledger receives a reward known as a “block reward.” This reward is paid out in virtual coins and is an example of how bitcoin transactions are verified. This process is called “proof of work”.
Iota, based on the Tangle, is the new generation of cryptocurrencies
IOTA is a very new cryptocurrency based not on the blockchain but on the so called Tangle
- The Tangle consists of many strands that connect nodes
- Every point in Tangle represents a transaction.
- The entire Tangle consists only of transactions. Since each transaction confirms two previous transactions, the verification takes place on the network itself. In the Blockchain this is different: There, the confirmation is carried out by mining and this costs time and work.
The transaction rate
One problem with blockchain, as originally developed for Bitcoin, is the very low transaction rate. If the security measures are so high, as is necessary, for example, with the Bitcoin application, the transaction rates of the blockchain are in the low double-digit range. This is simply not enough for many applications.
For IOTA, the reverse is true: the transaction rate increases dramatically as more users use the system. In addition, the time to approve the transaction is much smaller at IOTA. At Blockchain, there is the consensus, that is, all must have the same state and that in turn is not the case with IOTA. Consensus costs a lot of time.
As the transaction rate increases, scalability also increases. With IOTA, the system continues to scale — the more subscribers and transactions the system has, the faster it gets. More importantly, the latency, that is, the time between placing a transaction and validating, tends to zero as soon as you reach a certain size.
In the blockchain, for example the application use Bitcoin as a payment system, there is the problem of mining processes. In essence, these are basically external data centers that generate new blocks and insert pending transactions. For this they get a so-called “financial reward”, for example, the transaction fee set by the sender of the transaction. The higher this is, the more attractive is the processing of the transaction for the so-called Miner and vice versa. As a result, the smallest payment amounts are ultimately made impossible by high transaction fees. This is completely eliminated with IOTA: Everyone is part of the network and you validate others automatically. So it is possible to handle even very small amounts.
The problem with blockchain customers is that the technology is costly in terms of computing power and security assurance. If you want to use the Blockchain technology in your own house, it will be difficult or even impossible to reproduce the concept of the miners, which, for example, guarantees extreme security for Bitcoin to the same extent. Conceptually, more and more computing power is needed. IOTA is a lot smarter because you do not need the whole mining process.
There is still a lot to do, but I think you should be open-minded with cryptocurrencies. In a few years there will be many applications based on Blockchain or Tangle. In my opinion, it is worthwhile to deal intensively with the crypto currencies and the tangle.
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