Blockchain or one of its applications is one of the hottest topics in recent times. All the laymen are wondering it’s too late to invest in it and techie trying to understand how the technology behind the scene works. In this blog, I am focusing on the second aspect, the technology behind it, and trying to explain how I understand it and all the useful links I find out while researching this topic.
What is blockchain?
As per Wikipedia
A blockchain is a growing list of records, called blocks, that are linked together using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data (generally represented as a Merkle tree). The timestamp proves that the transaction data existed when the block was published in order to get into its hash. Blocks contain the hash of the previous block, forming a chain, with each additional block reinforcing the ones before it. Therefore, blockchains are resistant to modification of their data because once recorded, the data in any given block cannot be altered retroactively without altering all subsequent blocks.
Let’s try to understand this in simple terms, in this example, we are going to take two person, PersonA and PersonB. PersonA wants to send $100 to PersonB. In order for this transaction to be successful we need to abide by certain things:
- We need to agree on the terms of the transaction.
- Once the transaction is complete it’s final.
Let’s go one step further and while PersonA sends $100 to PersonB he will record this transaction in his own ledger(at this stage think ledger like a notebook where you are marking the entry). Similarly, PersonB maintains its own ledger and he will mark an entry that he receives $100. There is a major flaw in this whole process
- By mistake, I record $10 or $1000 in my ledger
- The other party is not trustworthy and he mentioned he never received it
- The ledger where you are maintaining transaction is lost
Now rather than maintaining the different ledger, we have one ledger shared between us, where once we write the entry it’s immutable, that is once the entry is recorded you can’t change it and the copy is not only shared between you this copy is shared between thousands of users. This is a blockchain in a nutshell.
So what blockchain exactly is
- It’s a constantly growing ledger or in simple terms, it’s a file that maintains all the records. The current size of Blockchain is 346.2GB.
- It keeps the record of every single transaction that ever happened
Now you understand what blockchain is let’s jump to the next topic, what is bitcoin
What is Bitcoin?
As per Wikipedia
Bitcoin is a decentralized digital currency, without a central bank or single administrator, that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
To understand bitcoin in simple terms, once again let take the simple example where PersonA wants to send $100 to PersonB. To send $100 he must need to use some third-party which can be anything Banks, PayPal, Xoom, etc. As you can see in this scenario you are relying on a third party and they have all the power, they can cancel or reject your transaction.
Now compare this with bitcoin where if PersonA wants to send PersonB $100 worth of bitcoin that transaction will happen peer to peer without the need for the third party.
Bitcoin limits to 21million coins
In the bitcoin source code, there is a limit set to 21 million bitcoin, and that why there will only ever be 21 million bitcoins ever produced. As the supply is limited this adds value to the digital asset. For more info please check this blog
How bitcoin works
Let’s now try to understand how bitcoin works
- Bitcoin consist of a network of nodes. Any system connected to the internet and running bitcoin software can be a node.
- Any transaction that happens on the public blockchain can be viewed by anyone.
- The bitcoin blockchain will be built by a group of people called miners. Miner’s work is to process and confirms the transaction. Miners solve the cryptography challenge and paid in bitcoin.
Different Components of Bitcoin
- Bitcoin software: Bitcoin runs on software and its open-source software and that software is built to run everything that bitcoin does.
- In that software, there is a cryptography challenge approximately every 10 min to build a new block.
- The entire miner community with their computer ready starts working on that challenge.
- A miner solves the cryptography challenge, he is awarded 6.5 bitcoin(currently, bitcoin award cut into halves every 4 years). If the miner is solving the cryptographic challenge quickly then the bitcoin network adjusts its complexity and starting giving complex changes but if the miner slow to solve the challenge bitcoin software starts providing a lesser complex challenge.
- The rest of the miner community verifies the validity of the new block mined.
- The new block of the transaction is added to the bitcoin blockchain.
Some key terms
Cryptographic hash: Hashing in cryptography is a method to convert any form of data to a unique text string. Bitcoin uses the sha256 algorithm.
Let use the website(demoblockchain.org) to demo this https://demoblockchain.org/hash . For example, if you provide string “prashant” it will generate the Hash which is a digital fingerprint
But if you change the single letter i.e change small p to capital P(Prashant) it will generate a completely new cryptographic hash.
Let’s tied this to the blockchain, where blockchain is made of blocks and data generates the hash https://demoblockchain.org/block
Now again if we change the data(p to P)the block changes to red.
Now if we see there is a field called Nonce(number only used once) which is a number added to a hashed or encrypted block in a blockchain that, when rehashed, meets the difficulty level restrictions. Now if we need to make this block valid again we need to find an appropriate Nonce and that what miner is doing all across the world is competing to find the appropriate number. The way this is tied to the blockchain where we have multiple blocks and in each block, you will see the field called Prev which is the hash of the previous block. Now if I changed anything in the blockchain, not only you break that block but all the further blocks. That’s the power of blockchain(immutability) it will make sure no one changes anything in the block as well as in the blockchain.
Introduction to Cryptocurrency
As per Wikipedia
A cryptocurrency, crypto-currency, or crypto is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in a form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.
Now let’s try to understand in simple language with the advantage it offers. Let take a scenario in which you want to send $100 to any other country in this example let’s take India. In order to do that you need to use any third-party provider and also you need to pay some fees to that third-party provider to perform that conversion and this is where crypto-currency shines as you don’t need to pay any fees to any provider as it’s a peer to peer communication. Also, it’s fast and instantaneous to understand that let takes another example where you want to perform a wire transfer. In case of a wire transfer, the sender needs to pay an additional fee as well as the receiver. On top of that, it’s not instantaneous. Sometimes it takes 24–48 hours to perform the local currency conversion.
To look at the available cryptocurrency in the market right now, please visit the below website
At the time of writing this blog, the number of cryptocurrencies available in the market is 10,066 with a 1.7 trillion market cap and Bitcoin dominates the market cap of 42.9%. In second place is Ethereum with a market cap of 18.7%.
Different type of Cryptocurrency
The table shows the comparison between three major cryptocurrencies
Initial Coin Offering(ICO)
Initial Coin Offering(ICO) is similar to Kickstarter or crowdfunding but using cryptocurrency. If an entrepreneur looking to launch a new cryptocurrency he can do that through ICO. Earlier there was little to no government regulation(nowadays there is increased regulation and legal actions) and anyone can launch an ICO provided they have the technology to back it up. The process is pretty simple, you need to create a whitepaper outlining the system, make an app or website to describe how it works, and then seek funding.
Beware of some of the scams that happened in the ICO field
Blockchain Use Cases
Blockchain use cases are not only restricted to cryptocurrency and bitcoin, but it also goes far beyond and used in a variety of other sectors. Some of the examples are:
- Non-fungible Tokens(NFTs): It’s one of the hottest blockchain applications. 2021 see the rise of digital items like art, music, videos, and GIFs that are sold on blockchain. Some of the famous examples are:
- Beeple sold an NFT for $69 million
2. ‘Nyan Cat’ flying Pop-Tart meme sells for nearly $600,000 as one-of-a-kind crypto art
CryptoKitties: A blockchain game on Ethereum developed by Canadian studio Dapper Labs that allows players to purchase, collect, breed, and sell virtual cats.
JPM Coin: JPM Coin is a digital coin designed to make instantaneous payments using blockchain technology.
Odysee: A new video site uses blockchain which gives creators more direct control of their content and their audience.
Limitation of Blockchain Technology
Let’s discuss some limitations of Blockchain
- Scalability: Scalability is one of the major concerns for blockchain. Anyone who used the Bitcoin network aware of the network congestion problem. As more people joining the network it’s even getting slower. If you compare Bitcoin with its counterpart VISA which can process 1700 transactions per second whereas Bitcoin can only do 4.6 transactions per second.
- Immutable: Data immutability is another major concern where the data are once written it can’t be removed. It’s useful in cases like financial systems or supply chains but if your case involves data modification then blockchain is not for you.
- High Energy Consumption: To update the ledger with the new transaction miner need to solve a complex mathematical problem that involves high electricity consumption(This is discussed in depth under Future of BlockChain and CryptoCurrency).
- Security Flaw Still Persists: Blockchain technology is secure as compare to other platforms but there are ways it can be compromised. One of the prime examples is a 51% attack where an entity can control 51% of the network nodes which can result in control of the network. By doing that attacker can modify the data in the ledger.
- Managing your own Private Keys: In order to access your assets, users need private keys. This is generated during the wallet creation time if it lost there is no way to recover it and you will lose your wallet forever.
Some of the common myths and misconceptions related to Blockchain technology are:
- Blockchain is Bitcoin: This is one of the common myths that Blockchain is Bitcoin. One of the reasons for this myth is both of the technologies become famous at the same time. In reality, Bitcoin is one of the applications of Blockchain.
- All Blockchain is Public: Not all Blockchains are public. Other ones are private and federated. In the case of Private Blockchain, permission is restrictive and they operate in a closed network. For e.g. JPM coin discussed above.
- Blockchain is a Database: Blockchain is definitely not a database. Database stored information in a centralized place in the form of tables whereas Blockchain stored records and transactions in the form of blocks visible to everyone. Another major difference is in databases you can modify data whereas Blockchain is immutable.
- Targetted only for Finance Sector: Another misconception is it’s only targetted for the Finance sector but as you see in the Blockchain use cases above other industries like healthcare, supply chain, manufacturing starts adopting it.
Future of BlockChain and CryptoCurrency
Let’s understand the future of BlockChain and CryptoCurrency with the help of one of the famous CryptoCurrency Bitcoin.
One of the major challenges with blockchain/cryptocurrency is the amount of electricity it consumes while solving the mining challenge and that challenge is getting complex every day which means it requires more computing power. As you can see below chart the amount of electricity consumed during bitcoin mining is more than the electricity consumed by some countries.
So electricity consumption will become the key factor in bitcoin mining. Higher electricity will definitely shrink miner’s profit down.
Same thing we can correlate to the carbon footprint generated while mining the bitcoin as it consumes a large amount of electricity generated with fossil fuels.
Bitcoin production is estimated to generate between 22 and 22.9 million metric tons of carbon dioxide emissions a year, or between the levels produced by Jordan and Sri Lanka, a 2019 study in scientific journal Joule found.
So is the future looks dark for cryptocurrency? The answer is no as the major cryptocurrency already start looking for alternative options like renewable sources of energy like solar or wind farms. Ethereum 2.0 will dramatically slash the cryptocurrency network’s energy demands. It’s going to follow a different approach Proof of stake(PoS) rather than Proof of Work(PoW) which state that a person can mine or validate block transaction based on the number of coin they hold. More the number of coins you hold the more mining power you have.
- The Rise and Rise of Bitcoin | DOCUMENTARY | Bitcoins | Blockchain | Crypto News | Digital Cash
- Bitcoin Documentary | Ethereum | Vitalik Buterin | Bitcoins | Cryptocurrencies | Crypto | Blockchain
- Top 5 Largest BITCOIN MINES on Earth
- To check all the bitcoin transactions happening around the world, please check this website
- To check how all the currency(us dollar, pound, yen etc) changing into cryptocurrency all across the world
- Coinmarket Cap
- Bitcoin uptime
- Local Bitcoins
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