Cryptocurrencies and Blockchain
In recent years you may have heard more and more about cryptocurrencies and blockchain. However, many newspapers and television programs have often dealt with the subject superficially. We have heard the most disparate opinions regarding these two new technologies – from the praise of the “Bitcoin millionaires” to the total rejection of this technology by American banks and hedge funds. In a few words, over the last years there has been both a lot of euphoria and a lot of contempt, but where do these conflicting feelings come from?
In order to understand the functioning of cryptocurrencies, we must first understand how the platform at its base works. Blockchain was conceived and developed in 1991 by two New Yorkers who co-founded the computer company “Surety”: Stuart Haber and Scott Stornetta. This platform is a database that records every information in a private, clear, verifiable, and decentralized way. The network is made up of thousands of cubes of information that encompass any transaction made on it in an unrepeatable, permanent, and traceable way. As well as having a very wide field of applications, the real revolution of this new technology is the decentralization of the blockchain electronic register.
The current world banking system is based on a centralized model, where central banks manage the money of small investors. Unfortunately, no matter the level of computer security that a bank has put in place to safeguard the privacy of its users, it is relatively easy for hackers to access all sensitive data. The distinguishing decentralization of blockchain instead makes the register unalterable. Many users have on their computer an unaltered copy of the register. In order to modify the archive permanently, hackers should take simultaneous control of all register holders and, being those who use the service millions if not billions, this is practically impossible. Since 1991, blockchain has never been hacked, making it the safest technology ever used up to now.
The Merkle Tree and the Peer-to-Peer Network
The fundamental principles that have allowed the breakthrough brought by blockchain are two – the Merkle Tree and the Peer-to-Peer Network. The Merkle Tree is based on a simple principle. In this decentralized network, there are many blocks formed by mathematical codes and each block presents on its surface, in addition to its own recognition code, also the code from the previous block. These codes are called Hash codes. Their peculiarity lies in the fact that if the information within the block were changed, it would also change its external structure. In this way, once a transaction is carried out it is impossible to modify it retrospectively since the Hash codes would no longer match with each other.
Such a database eliminates the need for an external supervisor because a Peer-to-Peer Network is established to check that all transactions are legally enforced. The register is kept by the various users who agree to take this responsibility. In 2018 the Bitcoin register reached 100 gigabytes of information and is stored on the computers of various individuals around the world called “miners”. The miner is a figure that controls the validity of transactions carried out with the Bitcoin, making the system safer. Furthermore, all payments are recorded anonymously, while at the same time being accessible to everyone. On the one hand, blockchain protects the privacy of individuals and, on the other, it verifies that there is complete traceability of transactions, discouraging illicit trades and crimes.
Different Types of Cryptocurrencies
But what are actually cryptocurrencies? A cryptocurrency is a fully digitalized currency to which the market attributes a value based on the laws of supply and demand. The more people are interested in buying a certain cryptocurrency, the greater its value will be on the market. There are currently around 1500 cryptocurrencies in the world. The software to create new cryptocurrencies is open-source and has no restriction of any kind. Anyone can open his currency online in a completely private and protected manner.
Over time, therefore, the most disparate digital coins were born. Besides Bitcoin, there are Ethereum, Litecoin, and Ripple. Each cryptocurrency is different from the others for two main aspects: some give greater value to all units (1 Bitcoin = $5000) and involve commission fees to carry out financial transactions, while others are cheaper and do not have additional fees (1 Litecoin = $100). This difference determines the various purpose of each coin: some are used to accumulate wealth, while others are an effective currency of daily exchange.
In order to understand the functioning of cryptocurrencies, we must first understand how the platform at its base works. Blockchain was conceived and developed in 1991 by two New Yorkers who co-founded the computer company “Surety”: Stuart Haber and Scott Stornetta. This platform is a database that records every information in a private, clear, verifiable, and decentralized way. The network is made up of thousands of cubes of information that encompass any transaction made on it in an unrepeatable, permanent, and traceable way. As well as having a very wide field of applications, the real revolution of this new technology is the decentralization of the blockchain electronic register.
The current world banking system is based on a centralized model, where central banks manage the money of small investors. Unfortunately, no matter the level of computer security that a bank has put in place to safeguard the privacy of its users, it is relatively easy for hackers to access all sensitive data. The distinguishing decentralization of blockchain instead makes the register unalterable. Many users have on their computer an unaltered copy of the register. In order to modify the archive permanently, hackers should take simultaneous control of all register holders and, being those who use the service millions if not billions, this is practically impossible. Since 1991, blockchain has never been hacked, making it the safest technology ever used up to now.
The Merkle Tree and the Peer-to-Peer Network
The fundamental principles that have allowed the breakthrough brought by blockchain are two – the Merkle Tree and the Peer-to-Peer Network. The Merkle Tree is based on a simple principle. In this decentralized network, there are many blocks formed by mathematical codes and each block presents on its surface, in addition to its own recognition code, also the code from the previous block. These codes are called Hash codes. Their peculiarity lies in the fact that if the information within the block were changed, it would also change its external structure. In this way, once a transaction is carried out it is impossible to modify it retrospectively since the Hash codes would no longer match with each other.
Such a database eliminates the need for an external supervisor because a Peer-to-Peer Network is established to check that all transactions are legally enforced. The register is kept by the various users who agree to take this responsibility. In 2018 the Bitcoin register reached 100 gigabytes of information and is stored on the computers of various individuals around the world called “miners”. The miner is a figure that controls the validity of transactions carried out with the Bitcoin, making the system safer. Furthermore, all payments are recorded anonymously, while at the same time being accessible to everyone. On the one hand, blockchain protects the privacy of individuals and, on the other, it verifies that there is complete traceability of transactions, discouraging illicit trades and crimes.
Different Types of Cryptocurrencies
But what are actually cryptocurrencies? A cryptocurrency is a fully digitalized currency to which the market attributes a value based on the laws of supply and demand. The more people are interested in buying a certain cryptocurrency, the greater its value will be on the market. There are currently around 1500 cryptocurrencies in the world. The software to create new cryptocurrencies is open-source and has no restriction of any kind. Anyone can open his currency online in a completely private and protected manner.
Over time, therefore, the most disparate digital coins were born. Besides Bitcoin, there are Ethereum, Litecoin, and Ripple. Each cryptocurrency is different from the others for two main aspects: some give greater value to all units (1 Bitcoin = $5000) and involve commission fees to carry out financial transactions, while others are cheaper and do not have additional fees (1 Litecoin = $100). This difference determines the various purpose of each coin: some are used to accumulate wealth, while others are an effective currency of daily exchange.
I loved reading this, especially because I used to mine a bit and I was unaware of the history of blockchain itself. I find it interesting that people's opinions of the blockchain and crypto tend to be either they hate it completely or love it fully, opposite ends of the spectrum. It's met a lot of skepticism, especially from US banks, but I believe some have plans to adopt crypto. Also, there are other differences between the currencies such as the way they interact with the blockchain and network in general, making certain ones better for certain applications then others.
ReplyDeleteI heard a lot about Bitcoin in the media over the past years. As far as I understood, it lost most of its value over the last year. So I wonder if it is a safe investment after all. The technology might be safe from hacking, but the value of the currency is very volatile.
ReplyDeleteI like how in depth you go in this post. You explain the two subjects really well. Information security becomes more and more necessary by the day as more of the world becomes digitized.
ReplyDeleteI took a class on cryptocurrency while I was studying at HEC-Paris and it was very fascinating. I like the idea of decentralizing currency from governmental control. The internet decentralized information, cars decentralized transportation, why not decentralize money?
ReplyDelete-Diana