After the severe economic crisis that struck the economies of major powers in 2008, the world began searching for ways to protect itself from another global market crash. Thus, the following year saw the development of one of the most influential technologies of this century so far.
Perhaps the most memorable aspect of that time is cryptocurrencies , those digital currencies that are so widely traded today, but what's truly important is the technology behind them: Blockchain . Also known as Chain of Blocks, this is the foundation of all modern cryptocurrency trading.
In this article we'll tell you everything you need to know about Blockchain technology and its main features, so you can fully understand this digital environment in which cryptocurrencies operate.
What is Blockchain and what is this cryptographic technology used for?
Blockchain technology is a shared database where information is grouped into encrypted blocks, which are linked to previous blocks in the system . This linking is what gives it the name "chain," since all the blocks are connected, and to modify one of them, it is necessary to modify all subsequent blocks, making it immutable and 100% transparent.
This also allows for transactions to be performed on it that are verified and recorded over time without the need for a certifying entity , making it a completely decentralized technology. This is why it enables the creation of, for example, global economic systems that do not require the participation of banking or governmental institutions, giving users control of the entire system.
Do you understand its importance now? Because major global economic crises are largely caused by the mismanagement of systems by regulatory bodies, this technology is being developed to allow us to get rid of all of them, creating a huge P2P (peer-to-peer) exchange network , in which everything is based on the users' trust in the system itself.
What are the characteristics of Blockchain technology?
This technology may seem like a simple database, but it's actually much more than that. Its unique features are unlike anything else created to date, and it's these features that have earned the trust of millions of people worldwide, who invest their money in the various projects that rely on it.
Consent
Blockchain consensus refers to the fact that modifying or forking the blockchain (creating a new chain) requires the widespread agreement of all nodes (users) on the network . This makes it virtually impossible for anyone to take unilateral actions independently, as they would need the support of more than half of the chain's members.
These consensuses are not impossible to achieve, but when they are reached, they are intended to modify how the entire chain functions, not to tweak or delete a particular transaction. This is one of the main foundations of the transparency that characterizes this database.
It cannot be modified
This is related to the previous point. When a transaction is modified, all subsequent transactions are automatically altered , so everyone would notice. Furthermore, the cryptographic method used (hashing) makes it nearly impossible to decrypt a block for modification.
Since it is such a cumbersome operation, which also requires having powers superior to those of the other members (which are only obtained with consensus), it is considered practically impossible to unilaterally modify a block of the chain.
It is decentralized
Perhaps the most striking aspect of this is that it's a decentralized database. This means it doesn't require supervision (or control) from any government or financial institution like banks . This allows for the creation of all kinds of P2P systems, where member users have complete control over their behavior.
Enhanced Security
By creating a block that is automatically linked to all subsequently created blocks, unique transparency is achieved, since modifying one block will modify all the others. This aspect elevates network security to another level . Furthermore, the hashing used to encrypt transactions is virtually impossible to decrypt.
Types of blockchains: How are they classified and how do they work?
Since their inception more than a decade ago, blockchains have evolved enormously, so we can identify various types of them, each with special characteristics that differentiate them from the others:
According to data access
The first way to classify blockchains is according to how users access their data. In this sense, two types can be defined: public and private.
Public blockchains are those in which all network users can review, verify, and confirm each and every transaction made . They are transparent, as everything is publicly available, and they adhere to consensus rules for modification. This is the type of blockchain used for Bitcoin and other cryptocurrencies.
Private blockchains, on the other hand, are entirely different and lose some transparency, as transaction data is accessible only to certain entities within the blockchain . Aspects like consensus are disregarded, since the "administrators" have complete freedom to modify the chain, making them typically centralized. An example of this is the Petro, a Venezuelan cryptocurrency backed by oil and centralized by the Venezuelan government.
According to the permits
The next known chains are those that depend on permissions, and these can be classified as permissionless and permissioned blockchains . They are primarily related to the creation or encryption of blocks.
- Which They do not require permission.These are networks where any member of the chain can act as a node to apply the hashing that encrypts each transaction. To facilitate this, incentive tokens are created, so that users who help with this task receive them as a reward for their collaboration.
- chains with permissions These are those in which the blocks are encrypted by a select group of users with the necessary permissions to perform this task. In these cases, the incentive token is not necessary..
Hybrids
Hybrid chains are those that have characteristics of both of the previous models. Examples include chains like Bitcoin Cash or Ethereum Classic , which are considered permissionless public chains, as well as permissionless private chains.
According to the state change model
State change refers to how a transaction changes from its entry to its exit state. The most popular are so-called outgoing-spending chains, in which each transaction generates an expense that is used to "fund" subsequent incoming transactions that will be created when making a transaction in the future. This model is used, for example, by Bitcoin.
Side chains
Finally, we have sidechains, which are those used to confirm transactions on a central blockchain.
Hashing in the Blockchain: How are blocks encrypted within the network?
Blockchain blocks are encrypted using a hash function, which assigns a unique hexadecimal number to each transaction. This number identifies the input data for every transaction. In the world of cryptocurrency mining, a new block containing a transaction must be created every 10 minutes, so "miners" compete to decipher the correct hash of each transaction to record it on the blockchain.
Hashing is a function older than blockchain itself; it is an algorithm widely used in the past, and its application in this technology is largely what allows the security of the network to be guaranteed, since if it is desired to modify a block, the hexadecimal value will have to be deciphered again, with input data identical to that used the first time.
What are cryptocurrencies and how are they related to Blockchain technology?
Cryptocurrencies are simply currencies used to exchange or trade goods and services on a blockchain. Using strong cryptographic techniques , they transparently record transactions , as well as the number of units of each cryptocurrency.
By using cryptography and a transparent and tamper-proof database like blockchain, a new decentralized economic system is achieved, in which the value of each currency is not determined by any government or banking entity , but by the trust and volume of money that enters its market.
A special feature of these coins is that they are limited in supply; unless there is consensus, this number cannot be increased. Therefore, the more people invest in them, the more value they gain, and vice versa.
Which cryptocurrencies are the most widely used?
After Bitcoin's first bull market occurred in 2011, new cryptocurrencies pegged to it were born, thus forming what are known as altcoins, which would be the most used cryptocurrencies with the highest market value.
These would be the following :
- Bitcoin: The first cryptocurrency, developed in 2009 by an anonymous user named Satoshi Nakamoto, reached a value of up to $20.000 USD in January 2018.
- Litecoin: The second oldest cryptocurrency after BTC. It is the token of an open-source software project with technical aspects identical to those of Bitcoin.
- Ethereum: These are tokens for a decentralized application, which in turn allows the creation of other similar apps that operate on a public blockchain. It is the most valuable cryptocurrency after Bitcoin.
What is an ICO?
An ICO, or Initial Coin Offering, is simply the pre-sale of tokens or cryptocurrencies for a new blockchain project. This represents the lowest price at which these currencies can be acquired on the market before their official launch ; the price will subsequently rise as more investors join.
ICOs are a great way to get ahead of other investors. In a way, it's like buying shares of a company, and once the company is successful, those shares will increase considerably in value. The most famous ICO is arguably Bitcoin's in 2009, when it started at just a few cents and seven years later reached a price of up to $20.000 USD.
What are the most interesting uses of blockchain technology beyond cryptocurrencies?
While the most common use of this technology is in cryptocurrencies, it is so versatile and practical that it can also be used for tasks such as the following :
- R3 Consortium.
- Property Registry.
- Real-world payments.
- Carsharing.
- Cloud storage.
- Digital identity.
- Music.
- Public/Government Services.
- Social security and healthcare.
- Authorship management.
Now you know all about this revolutionary technology that changed the way we trade and will possibly continue to change things in the near future, since we have barely exploited 20% of its real potential.
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