BLOCKCHAIN
What is Blockchain?
There are three principal technologies that combine together to create a blockchain. These include private key cryptography, a distribution network with a shared ledger and an incentive to maintain the network's transactions, record-keeping and security. These combine to make blockchain technology a decentralised, transparent and immutable system.
Decentralisation
Most traditional forms of payments are centralised. For example, your bank stores your money and to pay someone else you have to go through the bank. This has several vulnerabilities:
- All the data is stored in one spot making it an easy target for hackers.
- If the centralised entity shut down or became corrupted nobody has access to the information it possesses. In a decentralised system, such as the one created by using blockchain technology, the information is not stored just by one single entity. Everyone in the network owns the information and can access the history of transactions but cannot change it. This immutability is another key pillar of blockchain technology.
Immutability
Once something has been entered into the blockchain it cannot be tampered with. There is no possible way to 'fiddle with the books'. This is because the underlying technology uses cryptographic hashes. In the context of payments, this means transactions are taken as an input and run through a hashing algorithm which gives it an output of fixed length and fixed size. This means that each hash could identify a very large set of calculations or string of data.
Transparency
Perhaps the most interesting aspect of blockchain technology is the fact it offers a high level of transparency and privacy at the same time. A user's identity is hidden behind complex cryptography and can only be identified by their public address.
At the same time, while the user's identity is secure, you can still see all the transactions that have been done on their public address. This level of transparency does not exist within the current financial system which is why blockchain technology is changing the field of finance as we discuss later on in this article.
How does blockchain work?
Let's say Joe wanted to send money to Enzo. Using blockchain technology this transaction would be represented online as a block. This block would be distributed across the blockchain network which is a special kind of peer-to-peer network where the workload is partitioned between participants rather than one central server.
Once the network verifies that the transaction is valid, the block is then added to the chain and reconciled across the network, creating a permanent record. David's record of ownership of the money then moves to John. In essence, the technology helps to cut out the middleman but with full transparency and privacy.
Privacy in Blockchain
Blockchain technology accounts for the issues of security and trust in several ways. First, new blocks are always stored linearly and chronologically. That is, they are always added to the “end” of the blockchain. If you take a look at Bitcoin’s blockchain, you’ll see that each block has a position on the chain, called a “height.” As of January 2020, the block’s height had topped 615,400.
After a block has been added to the end of the blockchain, it is very difficult to go back and alter the contents of the block. That’s because each block contains its own hash, along with the hash of the block before it. Hash codes are created by a math function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes as well.
Here’s why that’s important to security. Let’s say a hacker attempts to edit your transaction from Amazon so that you actually have to pay for your purchase twice. As soon as they edit the dollar amount of your transaction, the block’s hash will change. The next block in the chain will still contain the old hash, and the hacker would need to update that block in order to cover their tracks. However, doing so would change that block’s hash. And the next, and so on.
In order to change a single block, then, a hacker would need to change every single block after it on the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power. In other words, once a block is added to the blockchain it becomes very difficult to edit and impossible to delete.
To address the issue of trust, blockchain networks have implemented tests for computers that want to join and add blocks to the chain. The tests, called “consensus models,” require users to “prove” themselves before they can participate in a blockchain network. One of the most common examples employed by Bitcoin is called “proof of work.” In the Proof of Work system computers must “prove” that they have done “work” by solving a complex computational math problem. If a computer solves one of these problems, they become eligible to add a block to the blockchain. But the process of adding blocks to the blockchain, what the cryptocurrency world calls “mining,” is not easy. In fact, the odds of solving one of these problems on the Bitcoin network were about one in 15.5 trillion in January 2020.To solve complex math problems at those odds, computers must run programs that cost them significant amounts of power and energy.
Proof of work does not make attacks by hackers impossible, but it does make them somewhat useless. If a hacker wanted to coordinate an attack on the blockchain, they would need to control more than 50% of all computing power on the blockchain so as to be able to overwhelm all other participants in the network. Given the tremendous size of the Bitcoin blockchain, a so-called 51% attack is almost certainly not worth the effort and more than likely impossible.
Applications Of Blockchain
One of the first real-world uses of this technology was in cryptocurrencies such as Bitcoin and Ethereum. This is because of the fact that the technology allows digital information to be distributed and not copied, meaning each data piece can only have one owner which is essential when dealing with payments; in effect, a digital ledger.
BitCoin BlockChain
In 2008, someone using the pseudonym Satoshi Nakamoto created Bitcoin. As the Bitcoin blockchain is decentralised, it is not controlled by one central authority, unlike traditional currencies which are issued by a central bank. Instead, the Bitcoin blockchain is maintained by a network of miners (sometimes called 'nodes'). These nodes are purpose-built computers that solve complex mathematical problems in order for the transaction to go through.
Imagine David makes a Bitcoin transaction. This transaction would originate from David's digital currency wallet which will have a private key. This key is David's digital signature which provides the mathematical proof the transaction has come from that wallet.
If more people make more transactions then these will all get grouped together into a block which will be organised by strict cryptographic rules. This block will then be sent out to the Bitcoin network and once validated will be added onto the previous blocks, thereby creating a blockchain.
This may sound like a very long and convoluted way to make a transaction but remember that all these transactions are transparent and listed on the Bitcoin ledger (which you can search for using a Bitcoin explorer). It also requires several parties to authenticate the transaction and if one part of the network went down the whole network would not collapse.
Ethereum blockchain
After the hype - and success - of Bitcoin, a number of other companies created blockchain platforms that were more friendly to use in the real world and by corporations. The world's second-largest digital coin by value - after Bitcoin - is Ethereum. This is essentially a blockchain platform that specialises in smart contracts and has a digital coin named 'Ether' linked to it.
The Ethereum blockchain is public, just like Bitcoin's, and allows people to build decentralised apps on its platform, specialising in smart contracts. These are contracts that are automatically executed when certain conditions have been met from all intended parties. This level of automation helps to speed up the process.
Blockchain wallet
A blockchain wallet is a software programme which enables users to buy, sell and monitor their balances for digital currency such as Bitcoin and Ethereum. It's important to note that a blockchain wallet does not store cryptocurrencies. They simply keep a record of all the transactions related to the currency (your public and private keys) and stores them on Blockchain.
There are different types of blockchain wallets available. Hardware wallets are hardware devices such as USB pens that store private keys for a user. There are also software wallets, such as desktop, online and mobile apps, that store private keys for any transactions made.
Blockchain technology itself, its uses and the services around it are big business. It's why many major companies are pouring billions of dollars into its development. However, there are some blockchain stocks which stand out from the rest. Before we look at these, let's cover how you can learn more about, or improve your knowledge of, blockchain technology.
Blockchain stocks
To demonstrate just how many investors are interested in blockchain stocks, you just need to look at Riot Blockchain This was a penny stock which in 2017 went from just $8 per share to $40 per share when they changed their name from Bioptix Inc to Riot Blockchain.
The company was a maker of diagnostic machinery for the biotech industry. After changing its name and rebranding itself to have a focus on buying cryptocurrency and blockchain businesses, the stock shot up on investor hype. Subsequently, the company was investigated by the SEC (Securities and Exchange Commission).
This is an example of why investors need to do their research before buying into the potential of blockchain technology. However, there are some well-known large corporations that are investing billions into the technology which investors should know about.
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