What Is Blockchain, Cryptocurrency And Do You Need It?
By Brandon Goh on ALTCOIN MAGAZINE
Simply put, blockchains are a chain of blocks linked together in sequence. Each block contains the timestamp of its creation, processed transactions, previous and current block hash, and several other types of data. Because each block depends on the previous one, any attempts of modifying a block will require all blocks after it to be modified as well and require a huge amount of computing power (resistance to 51% attack) but are not impossible if coordinated with multiple parties.
Blockchains, In General, Have 4 Properties:
1.) Secure
Two keys are needed for any wallet, private and public key. As the term implies, the private key is only known to the user while the public key is for everyone to see. The private key decrypts data and public key encrypt data. This is the same for any cryptographic application. Your wallet address is obtained from the hashing of the public key. For simplicity, the wallet can be visualized as your signature or biometric data in digital form. Keys are generated using Elliptic-Curve Cryptography (ECC), specifically using the secp256k1 curve. Hashing is done using the Keccak algorithm, which is a variant of SHA3.
2) Anonymity
Since addresses are derived from hashing, each wallet can only be identified by its hexadecimal string and cannot be traced to the user. Of course, this will not hold if a third-party provider is used to convert cryptocurrencies to other forms of cryptocurrencies or physical currencies, where a form of identification is usually required and is logged.
3) Transparency
All transactions performed are recorded in the blockchain and can be viewed by anyone. For Ethereum, Etherscan is a public site where blockchain data can be viewed.
4) Distributed
This type of network topology has an extremely high fault tolerance since the downtime of machines will not bring down the blockchain. At any point in time, a minimum of 3 machines must always be online for the blockchain to function.
In general, data stored in the blockchain is considered immutable due to the difficulty of modifying data in any block. This property is useful in cases where data preservation is required. Ethereum exploits this feature through the introduction of smart contracts. Smart contracts function similarly to physical contracts except that it is now in digital form, on the Ethereum blockchain. Because of this, contracts are subjected to the same properties of the blockchain. As contracts are transparent, parties entering into the contract cannot dispute its contents as the interpretation of the code is absolute. Any form of currencies arising from these contracts are known as tokens and are subjected to the ERC-20 standards but will not be elaborated here.
Up to this point, the relationship between blockchains and cryptocurrencies were not clearly defined. Blockchains are not equivalent to cryptocurrencies. This is a common misconception. Blockchain is technology while cryptocurrency is the by-product of the technology. In some cases where blockchains serve a specific purpose, such as the long-term storage of data within an organization, the cryptocurrency generated is redundant and serves no purpose.
Cryptocurrency in its basic form is used to pay for the transactional cost (equivalent to paying for services) and can only be generated by having users contribute computing power to have these transactions stored in a blockchain, otherwise known as the term “mining”.
The value of any cryptocurrency is subjected to the natural economic laws of supply and demand, as with all physical currencies. The most popular ones being Bitcoin and Ethereum. Bitcoin has an upper limit of 21000000 BTC and excludes instances where users have lost their wallets. Therefore, the amount of BTC in circulation will be less than the theoretical upper limit. Ethereum, on the other hand, creates 5 ETH for every block created and will hence have an infinite supply if there are no changes to the structure of the Ethereum blockchain.
So, do you need to use a blockchain? This is a simple reference that you can use to see if it is suitable.
Image is taken from https://eprint.iacr.org/2017/375.pdf
As with any form of implementation, there are pros and cons. The pros for each of the various blockchains are mentioned in the flowchart so we will consider the general downsides instead.
1) Blockchains store all data from inception and storage may grow at an exceptional rate, depending on the amount of data stored. While storage media may be cheap, costs for replacements must also be factored in.
2) Blockchains are always online and require systems to be functional, adding to utility costs. Furthermore, depending on the size of your implementation, additional systems need to be provisioned.
3) Computing power is also a problem. When adding a new system to the network, the software works by downloading one block at a time. The block is verified and checked against the previous block until it reaches the genesis block. This is repeated until the blockchain is up to date with the network. The longer the blockchain is, the time needed to complete the blockchain may take a few days and is also heavily dependent on the specifications of the system. This problem is prevalent on both the Bitcoin and Ethereum blockchains.
4) When using public blockchains, you will also need to purchase the cryptocurrency to process transactions. Cryptocurrencies are not pegged to any physical currency and can be highly volatile. This may affect how often transactions can be issued for processing.
5) Data can be easily accessed and read if placed on a blockchain, therefore data should be properly encrypted if it is sensitive.
