Cryptocurrencies – Fundamentals of Blockchain

What is blockchain technology?  

Before we dig deeper into blockchain systems, let’s first talk about databases. A database collects and stores information on a computer system. Some databases are intended to keep large amounts of information that can be accessed and used by multiple users simultaneously. Massive databases use servers that are powered by many supercomputers.   

The key difference between blockchain and a basic database is the method in which the information is structured. Blockchain is a type of database that stores information by storing data in blocks that are then chained together.  New data is added to a fresh block, and once it is full, the new block becomes chained to the old block. In this way, the blocks form a chain of data, hence the name blockchain. Therefore, all blockchains are databases, but not all databases are blockchains.  

The data which is entered into a decentralized blockchain system is irreversible.  Every block gets a timestamp as soon as it is added to a chain, making it part of the timeline. Primarily, we use Blockchain technology for ledger transactions such as Bitcoin. It is easiest to understand blockchain by analyzing how Bitcoin uses it.   

What does decentralized mean?  

As you already know, Bitcoin is a type of digital currency. However, much like with fiat currencies, there must be a detailed ledger showing all transactions. This is where blockchain comes in. Bitcoin needs a massive database to store its blockchain, so it uses thousands of computers operated by individuals worldwide.   

So, unlike a company that has a warehouse with servers and computers operated by that company’s staff, Bitcoin’s computers are operated by different individuals. There is no central body, like a bank, that processes Bitcoin’s transactions. It is not one entity but a group of computers. This is how Bitcoin is decentralized.  

In a blockchain, each node (computer) has a full report of all the blockchain data since its inception. If there’s a data error somewhere, thousands of other nodes can help rectify the error as they all have the information. This also prevents any one from being able to alter the information, which is precisely why the data entered is irreversible. In the case of Bitcoin, the data relates to transactions, but it can be virtually anything. It is worth mentioning that centralized blockchains do exist, just not in the case of Bitcoin.  

Is it safe?  

Once the blocks are full, they are stored linearly and chronologically, making it difficult to alter anything without complete consensus. Each block has a corresponding hash as well as the hash of the previous block. These are created by a mathematical function that converts information into strings of letters and numbers. Therefore, if the information is altered, so is the hash. If someone were to alter their copy, it wouldn’t align with everyone else’s hash and would therefore be dismissed.  

Why is blockchain popular?  

Decentralized blockchains offer transparency, something that people all around have been longing for. With the war against the COVID-19 pandemic and the quantitative easing, now, more than ever before, people are afraid of the economic consequences. As a result, Bitcoin, a decentralized currency using blockchain, has surged past expectations and risen to 40k in the beginning of 2021. Both retail and institutional investors seek to avoid hyperinflation and see a happy end to these difficult times. 

However, their lack of guaranteed value and digital nature means the purchase and use of bitcoins carries several inherent risks. The concept of a virtual currency is still novel and, compared to traditional investments, Bitcoin doesn’t have much of a long-term track record or history of credibility to back it.