Cryptocurrency and Blockchain Technology…(The Eureka Moment)
I am sure everyone of you has ever heard of Bitcoin, Blockchain and the like. Have you ever taken time to understand what all these terminologies mean and of what purpose they are to the Cryptocurrency and Blockchain Technology in general? Ohm, I understand it is quite confusing at first if you don’t have a deeper background on it and how it works. It’s just the other day I happened to have a Eureka moment on this new tech and felt it would be awesome to share some bits of what I learnt.
First of all, lets do some definition of terms…
Cryptocurrency is a form of payment that can be exchanged online for goods and services 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. Just like a digital form of cash, crypto can be used to buy everything from your lunch to your next car or home. It typically does not exist in physical form (like paper money) and isn’t issued by a central authority say the Central Bank of Kenya (CBK). Cryptocurrencies uses decentralized control as opposed to a central bank digital currency (CBDC). Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions .There are various types of cryptocurrencies such as Bitcoin(BTC), Litecoin(LTC), Ethereum(ETH), Bitcoin Cash(BCH),Zcash(ZEC), Bitcoin Satoshi’s Vision(BSV), Stellar Lumen(XLM) among many others.
A brief history of the emergence of cryptocurrency and blockchain technology…
The story of these virtual coins (cryptocurrency) begins with one person: the cryptographer David Chaum.
In 1983, the American developed a cryptographic system called eCash. Twelve years later, he developed another system, DigiCash, that used cryptography to make economic transactions confidential.
However, the first time the idea or term “cryptocurrency” was coined was in 1998. That year, Wei Dai began to think about developing a new payment method that used a cryptographic system and whose main characteristic was decentralization. Shortly thereafter, Nick Szabo described bit gold. Like bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange, BitGold) was described as an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published.
In 2009, the first decentralized cryptocurrency, bitcoin, was created by presumably pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, in its proof-of-work scheme.
In April 2011, Namecoin was created as an attempt of forming a decentralized Domain Name System (DNS), which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It used scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin used a proof-of-work/proof-of-stake hybrid.
On 6 August 2014, the UK announced that its Treasury had been commissioned a study of cryptocurrencies, and what role, if any, they could play in the UK economy. The study was also to report on whether regulation should be considered.
In June 2021, El Salvador became the first country to accept Bitcoin as legal tender, that is, economic medium of payment that is accepted by the courts of law as satisfactory payment for any monetary debt.
How would you define Blockchain Technology…
A simple analogy for understanding blockchain technology is a Google Doc. When we create a document and share it with a group of people, the document is distributed instead of copied or transferred. This creates a decentralized distribution chain that gives everyone access to the document at the same time. No one is locked out awaiting changes from another party, while all modifications to the doc are being recorded in real-time, making changes is completely transparent.
Blockchain technology seems complicated, and it definitely can be, but its core concept is really quite simple. A blockchain is a type of database. To be able to understand blockchain, it helps to first understand what a database actually is. A database is a collection of information that is stored electronically on a computer system. Information, or data, in databases is typically structured in table format to allow for easier searching and filtering for specific information. One key difference between a typical database and a blockchain is the way the data is structured.
A blockchain collects information together in groups, also known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are chained onto the previously filled block, forming a chain of data known as the “blockchain.” All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled. A database structures its data into tables whereas a blockchain, like its name implies, structures its data into chunks (blocks) that are chained together. This makes it so that all blockchains are databases but not all databases are blockchains. This system also makes an irreversible timeline of data when implemented in a decentralized nature. When a block is filled it is set in stone and becomes a part of this timeline. Each block in the chain is given an exact timestamp when it is added to the chain.
Blockchain consists of three important concepts: blocks, nodes and miners.
Blocks
Every chain consists of multiple blocks and each block has three basic elements:
- The data in the block.
- A 32-bit whole number called a nonce. The nonce is randomly generated when a block is created, which then generates a block header hash.
- The hash is a 256-bit number (SHA-256) wedded to the nonce. It must start with a huge number of zeroes (i.e., be extremely small).
When the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block is considered signed and forever tied to the nonce and hash unless it is mined.
Miners
Miners create new blocks on the chain through a process called mining. Mining leads to the creation of value, that is, tokens and secures it from the double spending problem.
In a blockchain every block has its own unique nonce and hash, but also references the hash of the previous block in the chain, so mining a block isn’t easy, especially on large chains.
Miners use special software to solve the incredibly complex math problem of finding a nonce that generates an accepted hash. Because the nonce is only 32 bits and the hash is 256, there are roughly four billion possible nonce-hash combinations that must be mined before the right one is found. When that happens miners are said to have found the “golden nonce” and their block is added to the chain.
Making a change to any block earlier in the chain requires re-mining not just the block with the change, but all of the blocks that come after. This is why it’s extremely difficult to manipulate blockchain technology. Think of it is as “safety in math” since finding golden nonces requires an enormous amount of time and computing power.
When a block is successfully mined, the change is accepted by all of the nodes on the network and the miner is rewarded financially.
Nodes
One of the most important concepts in blockchain technology is decentralization. No one computer or organization can own the chain. Instead, it is a distributed ledger via the nodes connected to the chain. Nodes can be any kind of electronic device that maintains copies of the blockchain and keeps the network functioning. Blockchain also uses peer-to-peer distributed network where agreements or consensus in the network is achieved via proof of work which is mining/staking.
Every node has its own copy of the blockchain and the network must algorithmically approve any newly mined block for the chain to be updated, trusted and verified. Since blockchains are transparent, every action in the ledger can be easily checked and viewed. Each participant is given a unique alphanumeric identification number that shows their transactions.
Combining public information with a system of checks-and-balances helps the blockchain maintain integrity and creates trust among users. Essentially, blockchains can be thought of as the scalability of trust via technology.
Pillars of Blockchain Technology…
#Decentralization
In a decentralized system, the information is not stored by one single entity. In fact, everyone in the network owns the information. If you wanted to interact with your friend then you can do so directly without going through a third party such as WhatsApp. Also in a banking setting, you and only you alone are in charge of your money. You can send your money to anyone you want without having to go through a bank.
#Transparency
One of the most interesting and misunderstood concepts in blockchain is “transparency.” Some people say that blockchain gives you privacy while some say that it is transparent. Why do you think that happens?
Well… a person’s identity is hidden via complex cryptography and represented only by their public address. For instance, if you were to look up a person’s transaction history, you will not see “Bob sent 1 BTC” instead you will see “1MF1bhsFLkBzzz9vpFYEmvwT2TbyCt7NZJ sent 1 BTC”.
So, while the person’s real identity is secure, you will still see all the transactions that were done using their public address. If you happen to know the public address of one of these big companies, you can simply pop it in an explorer and look at all the transactions that they have engaged in. This forces them to be honest and perform their tasks with a lot of integrity (CIA triad), something that they have never had to deal with before.
However, that’s not the best use-case. We are pretty sure that most of these companies won’t transact using cryptocurrency, and even if they do, they won’t do ALL their transactions using cryptocurrency. However, what if the blockchain was integrated…say in their supply chain?
You can see why something like this can be very helpful for the finance industry right?
#Immutability
Immutability, in the context of blockchain, means that once something has been entered into the blockchain, it cannot be tampered with. Imagine how many embezzlement cases can be scrapped if people know that they can’t “work the books” and fiddle around with company accounts. The reason why the blockchain gets this property is because of the cryptographic hash function, SHA256.
Hashing? I know you almost consulting google on what that is, I got you…it means taking an input string of any length and giving out an output of a fixed length. In the context of cryptocurrencies like bitcoin, the transactions are taken as input and run through a hashing algorithm (Bitcoin uses SHA-256) which gives an output of a fixed length. Even if you make a small change in your input(as minute as changing the case of the first alphabet from say This to this)the changes that will be reflected in the hash will be huge.
Blockchain vs Bitcoin…
Bitcoin is a cryptocurrency, while blockchain is a distributed database. Bitcoin is powered by blockchain technology, but blockchain has found many uses beyond Bitcoin such as Ethereum, Zcash etc. Bitcoin promotes anonymity, while blockchain is about transparency.
Pros and Cons of Blockchain Tchnology…
Pros
- Improved accuracy by removing human involvement in verification
- Cost reductions by eliminating third-party verification
- Decentralization makes it harder to tamper with
- Transactions are secure, private, and efficient
- Transparent technology
- Provides a banking alternative and way to secure personal information for citizens of countries with unstable or underdeveloped governments
Cons
- Significant technology cost associated with mining bitcoin
- Low transactions per second
- History of use in illicit activities such as drug trafficking and other dark web activities.
- Regulation
How would you apply blockchain technology…
What next for Blockchain?
With many practical applications for the technology already being implemented and explored, blockchain is finally making a name for itself. As a buzzword on the tongue of every investor in the nation, blockchain stands to make business and government operations more accurate, efficient, secure, and cheap with fewer middlemen.
As we prepare to head into the third decade of blockchain, it’s no longer a question of “if” legacy companies will catch on to the technology — it’s a question of “when.”
Up Next…
A deep dive on what Bitcoin is.
Stay tuned…
