What is crypto?
If you’re trying to dive into this mysterious thing called a blockchain, you’ll be forgiven for coming back in fear for the sheer opacity of the technical jargon used to frame it. So before we learn what cryptocurrency is and how blockchain technology can change the world, let’s talk about what blockchain really is.
Simply put, a blockchain is a digital ledger of transactions, not unlike what we’ve been using for hundreds of years to record sales and purchases. The functionality of this digital ledger is, in fact, almost identical to that of a traditional ledger in that it records debits and credits between people. This is the basic premise behind blockchain; The difference is who keeps the ledger and who verifies the transaction.
With traditional transactions, some kind of intermediary is involved with the payment from one person to another to facilitate the transaction. Suppose Rob wants to transfer ম 20 to Melania. He can either give her cash in the form of a £ 20 note, or he can use some kind of banking app to transfer money directly to his bank account. In both cases, a bank is the mediator in verifying the transaction: Robb’s funds are verified when he withdraws money from a cash machine, or when he transfers digitally through the app. The bank decides whether the transaction should proceed or not. The bank also has a record of all transactions made by Robb and is fully responsible for updating it whenever Robb pays someone or receives money in his account. In other words, the bank holds and controls the laser and everything flows through the bank.
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It’s a lot of responsibility, so it’s important that Rob thinks he can trust his bank otherwise he won’t risk his money with them. He needs to feel confident that the bank will not defraud him, that he will not lose his money, that he will not be robbed, and that he will not disappear overnight. This requirement for trust has affected every major behavior and aspect of the monopoly financial industry, even when it was discovered that banks were irresponsible towards our money during the 2008 financial crisis, the government (other intermediaries) chose to risk breaking the final pieces of trust. Bail for them.
Blockchains work differently in one basic case: they are completely decentralized. There is no central clearing house like a bank, and no central book in the hands of an entity Instead, the laser is distributed across a vast network of computers, called nodes, each containing a copy of the complete laser on their respective hard drives. These nodes are connected to each other through a piece of software called a peer-to-peer (P2P) client, which synchronizes data across node networks and ensures that everyone has the same version of the laser at any given time. .
When a new transaction enters a blockchain, it is first encrypted using state-of-the-art cryptographic technology. Once encrypted, the transaction is transformed into something called a block, which is basically the term used for an encrypted group of new transactions. The block is then sent (or transmitted) to a network of computer nodes, where it is verified by the node and, once verified, passed through the network so that the block can be added to each computer at the end of the laser, under a list of all previous blocks. This is called a chain, so the technology is referred to as a blockchain.
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Once approved and recorded in the ledger, the transaction can be completed. This is how cryptocurrencies like Bitcoin work.
Removal of accountability and trust
What are the advantages of this system over a banking or central clearing system? Why would Rob use Bitcoin instead of ordinary currency?
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The answer is faith. As mentioned earlier, with the banking system it is important that Rob trusts his bank to protect and manage its finances properly. To ensure this, huge regulatory system exists to verify the functions of banks and ensure that they are suitable for the purpose. The government then regulates regulators, creating a kind of tiered system check whose sole purpose is to help prevent wrongdoing and misconduct. In other words, companies like the Financial Services Authority exist properly because banks cannot be trusted on their own. And banks often make mistakes and abuse, as we have seen many times. When you have a single source of authority, there is a tendency for abuse or abuse of power. The relationship of trust between people and banks is awkward and uncertain: we don’t really trust them but we don’t think there are many alternatives.
Blockchain systems, on the other hand, don’t have to trust them. All transactions (or blocks) in a blockchain are verified by nodes in the network before being added to the laser, which means there is no single point of failure and no single authorization channel. If a hacker wanted to successfully intercept a laser in a blockchain, they would have to hack millions of computers at once, which is almost impossible. A hacker would also be largely incapable of bringing down a blockchain network, as, again, they would be able to shut down every single computer on a network of computer networks distributed around the world.
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The encryption process itself is a key factor. Blockchains like Bitcoin use deliberately difficult processes for their verification methods. In the case of Bitcoin, blocks are verified by nodes by intentionally performing processor- and time-intensive series of calculations, often in the form of puzzles or complex mathematical problems, meaning that verification is not instantaneous or accessible. Nodes that provide blocks for verification are rewarded with a transaction fee and a favor of new bitcoins. It works both to motivate people to become nodes (because such block processing requires quite powerful computers and lots of power), where the process of creating – or minting – currency units is also conducted. This is referred to as mining, because it involves considerable effort (by a computer, in this case) to produce a new product. This means that transactions are verified in the most independent way possible than government-regulated bodies such as the FSA.
This decentralized, democratic, and highly secure nature of blockchain means that they can operate without the need for control (they are self-regulating), government or other opaque intermediaries. They work because people don’t trust each other, but nevertheless.
Let that sink sink in for a moment and begin to sense the tension around the blockchain.
Where blockchain applications outside of cryptocurrencies like Bitcoin become really interesting. One of the underlying principles of a blockchain system is secure, independent verification of a transaction, and it is easy to imagine other ways that such a process could be valuable. Surprisingly, many such applications are already in use or in development. Some of the best are:
- Smart Contract (Etherium): Probably the most exciting blockchain development after Bitcoin, Smart Contract is the block that contains the code that needs to be executed to fulfill the contract. The code can be anything, as long as a computer executes it, but in simple terms it means you can use blockchain technology (including its independent verification, unreliable architecture and security) to create a kind of escrow system for any type of transaction. . For example, if you are a web designer, you can create an agreement that verifies whether a new client’s website is up and running, and then when it does, it will automatically release the funds to you. No more chasing or invoicing. Smart contracts are also being used to prove ownership of assets, such as property or industry. There is a lot of potential to reduce fraud with this method.
- Cloud Storage (Storage): Cloud computing has revolutionized the web and the emergence of big data, which has started a new AI revolution. But most cloud-based systems run on servers stored in a single-location server firm, owned by a single entity (Amazon, Rackspace, Google, etc.). It presents the same problems as the banking system, in that your data is handled by a single, opaque entity that represents a single point of failure. Delivering data on blockchain completely eliminates the problem of trust and promises to increase reliability as blockchain networks are much harder to bring down.
- Digital Identification (ShoCard): The two biggest issues of our time are identification theft and data security. Extensive centralized services like Facebook contain so much data about us, and attempts by various developed-world governments to store digital information about their citizens in a central database, the potential for misuse of our personal data is alarming. Blockchain technology offers a possible solution by wrapping your original data into an encrypted block that can be verified by the blockchain network whenever you need to prove your identity. Applications in this range range from explicit replacement of passports and ID cards to password replacement. It could be huge.
- Digital Voting: Highly relevant in the context of the investigation into Russia’s influence in the recent US elections, digital voting is suspected of being both unreliable and extremely risky for tampering. Blockchain technology offers a way to verify that a voter’s vote has been successfully sent and that their identity has been kept secret. It promises not only to reduce election fraud, but also to increase the turnout of ordinary voters as people will be able to vote on their mobile phones.
Blockchain technology is still very much in its infancy and most applications are far from common use. Even Bitcoin, the most established blockchain platform, is subject to huge volatility, indicating its relative newness. However, the problem we face today in solving some of the major potential problems of blockchain makes following it an incredibly exciting and tempting technology. I must keep an eye out.