What do you think about when you hear the word “cryptocurrency”? There might be a variety of answers, starting from the financial revolution and the money of the future, ending with the dark market and speculators’ heaven. During their short life, digital assets gained considerable attention from media and global communities, as well as institutional financial giants. For example, JPMorgan Chase issued its own cryptocurrency in 2019.
However, for many people, crypto is still a mysterious unicorn of the 21st century. Thus, let’s shed a light on swiftly developing cryptocurrencies.
It’s important to mention from the very beginning that cryptocurrency and blockchain are different things. Blockchain is a technology, while a cryptocurrency is a digital asset that uses blockchain as an infrastructure. We will start a story about crypto by explaining its underlying technology — blockchain.
What is behind crypto? Blockchain technology
Proposed in 1991 by researchers Stuart Haber and W. Scott Stornetta, blockchain was supposed to combat document forgery first. Currently, it is applied in a broad variety of areas: finance, legal field, logistics, gambling and many more.
To simplify, blockchain is the technology that is used to store critically important data in a decentralized network. As the name implies, blockchain consists of the sequence of blocks. These blocks contain digital information, chained together and stored in a public network (this is what “chain” of blocks is). The participants can exchange digital information and values by means of adding new records into the blockchain. It works the following way.
Transactions. Getting rid of the middleman
The network acts as an immutable record of transactions between several parties that do not require any third party to process and validate the data. This network is also called P2P (peer-to-peer), in other words, operating without any central counterparty.
To illustrate, bank transactions are validated and processed by a central authority (bank). When you shop online or use a library, your operations are also verified by a third party. In contrast, with the blockchain, the transactions are validated by the network participants and mechanisms automatically.
Record and storage of data. Securing against fraud
Thus, since the transaction is validated by miners (or validators), it is added to the block with other transactions. Each block of transactions has a unique hash, a cryptographic code created by special algorithms. So, why is it called a chain?
To clarify, the hash of each new block contains a hash of the previous block. Therefore, the blocks are bonded by a chain of hashes, making it almost impossible to modify any piece of information in the blockchain without changing the entire chain. To change the information in a blockchain, a hacker would need to change the hashes of every following block.
What is more, the computers that are connected to the blockchain (they are called nodes) get a copy of the blockchain that is automatically updated. It means that there are many copies of the blockchain distributed among nodes, and it is almost impossible to change it.
As a result, a hacker would need to manipulate the data of multiple copies of the records (hashes). Sounds tricky, doesn’t it?
Privacy. Staying (pseudo)anonymous in a public network
Furthermore, even being transparent in some cases, blockchain allows not to reveal personal information to make a transaction. You do not need to provide your name, ID or anything personal. Instead, you use a “digital signature” (it is also named a “private key” and it is a de-facto single proof of owning address and digital assets, associated with it).
It means that you avoid the risk of compromising your personal information. You stay anonymous for everyone except those who you shared your digital addresses with.
Thus, blockchain is about decentralization, transparency, privacy and security. The technology gained attention and popularity in an array of areas, especially, in finance.
Cryptocurrency: digital money for the digital world
Almost two decades after blockchain was proposed, Satoshi Nakamoto (pseudonym) published the Bitcoin whitepaper (October 31, 2008), introducing the first digital asset that leverages blockchain technology.
The Bitcoin creator described it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”
Currently, the total number of digital assets is more than 5000, according to CoinMarketCap. An industry grows at a breathtaking pace and now the assets have various utility, purposes, and characteristics. However, the general concepts for many of them stay the same.
In general, a cryptocurrency is a digital asset that you can hold, use, spend, transfer and exchange between each other or fiat money, but not feel physically. Cryptocurrencies took the benefits of the blockchain as an infrastructure, solving some of the problems of fiat money. The major advantages are the following:
No authority involved. Obviously, as blockchain is decentralized, the crypto transactions do not require any third party to trust the money, in contrast to fiat (traditional) money that implies authority to rely on. Crypto allows the participants to conduct peer-to-peer transactions online (from wallet to wallet or via decentralized crypto exchanges) and be fully in charge of their money, avoid double-spending and other custody risks.
Note that in some cases a third party can be involved in your transactions with crypto. For instance, if you trade at a centralized cryptocurrency exchange. Anyway, peer-to-peer transactions are available and the choice of a trading platform is up to you.
Pseudo anonymity. What is more, in peer-to-peer transactions (make sure they are so!) you are not required to share any personal information to own, transfer and use digital assets. You can stay anonymous if you wish, being sure nobody monitors you and compromises your personal info.
Transparent transactions & security. At the same time, all the peer-to-peer transactions are publicly recorded within a blockchain and secured by complex encryption algorithms, therefore, they are hard to fake. You can review and prove your peer-to-peer transaction if needed.
Global money. Furthermore, the infrastructure enables cryptocurrencies to be global money. While traditional institutions often make the clients wait or pay considerable fees for international transactions, cryptos can be easily transferred around the world with minimal fees in a single click. No borders exist for digital assets!
Available. With all these benefits, crypto is available to anyone. You can buy and sell crypto (for example, at cryptocurrency exchange), hold it (digital wallet is one of the ways to store crypto, just like a bank account), spend it on goods and services (where crypto payments are accepted). Also, they can be exchanged between each other and fiat money. It is worth mentioning that today, cryptocurrency trading and investing are one of the prospective sources of profits.
At the same time, cryptocurrencies often face criticism for being the money of the dark market, having a weak legislative base, extreme volatility rate, hacker attack vulnerability.
Are blockchain and cryptocurrencies hype or not? Looks like we are yet to see. We will review the controversies and the use cases of cryptocurrencies and blockchain in the next article. Anyway, what is clear is that being around not for a long time, the crypto industry significantly matured and continues to realize its disruptive potential. Thus, probably soon you’ll buy a cup of coffee with your crypto!
Stay tuned for updates!
Telegram Channel: https://t.me/bizonex_news
Telegram Chat (English): https://t.me/bizonex_eng
Telegram Chat (Russian): https://t-do.ru/bizonex_ru
Facebook: https://www.facebook.com/bizonex
Twitter: https://twitter.com/bizon_ex
Reddit: https://www.reddit.com/user/Bizonex
