Blockchain and cryptocurrency for dummies
Blockchain became famous for being the fundamental technology behind many cryptocurrencies, and while the crypto craze has gone and went (for now), blockchain and cryptocurrency as a whole is here to stay. Although the prices for bitcoin has dropped significantly since it’s peak at nearly $20,000 last December, its’ current trading price at about $6,400 is still up from one year ago when it was trading at ~$5,500. Whether or not crypto will see another meteoric rise like last years, the fact that it’s still around means that there’s something more to the blockchain than just hype, and I’m here to explore why.
The cryptocurrency and blockchain has 2 major advantages: security and transparency. In essence, the blockchain is a decentralized giant ledger that keeps track of every single transaction that it has helped make. The important part here is decentralized, meaning that this ledger isn’t stored just in one centralized location like a regular ledger. Instead, it is copied and shared across a large network of computers, and frequently checks that every copy of the ledger is identical. Once a transaction is verified on the blockchain, added as a ‘block’ to the end of the ledger, and is permanent and publicly available for anyone to access. Each block is encrypted with a hash, which is based partially upon the previous block’s hash. This makes hacking the ledger and fudging the numbers basically impossible since you wouldn’t just need to change it in that one place, you’d need to change all the blocks and hashes that came afterwards, and make the same changes across the entire network.
Let’s dive a little deeper into what how this all affects bitcoin. Bitcoins are generated, or ‘mined’, every time a transaction is verified and added to the blockchain. While bitcoins are stored in a ‘wallet’, a wallet doesn’t actually hold any bitcoins. Instead, they hold the bitcoin address, which stores the transaction history and can therefore calculate the balance. The address is a public key, a string of 32 letters and numbers, and available for anyone to see. Each public key has a corresponding private key, a string of 64 letters and numbers, which similarly to a password in verifying that a transaction has been sanctioned by the party involved. As a reward for verifying the transaction, a miner is awarded some coins, as well as a small transaction fee. While this may sound simple, the verification process involves going through some complex math problems that basically require guessing the correct answer that will output the right solution hash. Moreover, since a transaction only needs to be verified once, it comes down to a game of chance among the computers trying to solve it.
Once it is solved, the winner is publicly declared and everyone else stops working on that one block and proceeds to the next. Each problem requires immense processing power to solve, and since it basically comes down to a game of chance, the more processing power and computers you have, the higher chance you have of ultimately being declared the winner. At the time of the crypto boom, each block rewarded 12.5 bitcoins, worth about $200,000 USD at the price peak. This is why graphics cards during the crypto boom were constantly sold out, and the secondary market prices were sky selling for about 3 times their retail price.
While blockchain has been primarily used for cryptocurrencies, its’ innate transparency and security makes it very appealing to other applications. Any public records worth keeping could potentially utilize blockchain, including tax regulation and compliance, and real estate ownership. Voting booths could also utilize blockchain to combat voter fraud. The technology is still in its’ early stages, the potential is there to revolutionize record keeping and data storage.