The economy has long been controlled by central banks, which the government indirectly runs. To pierce through this authoritative construct, the corrupt bureaucratic regime had to be overturned by something free from manual intervention. Technology is the best bet to counter human redundancy. When technology takes over predefined tasks, which we also refer to as automation, the efficiency increases exponentially while reducing the unwanted intrusion of the system. This is the value proposition of blockchain. Blockchain technology ushers a new era of economic decentralisation.
Let us discuss the uses of blockchain in detail, especially in finance and the benefits of this ingenious technology.
What is the Technology behind Cryptocurrency?
There are two main technologies behind magnanimous cryptocurrencies. One is cryptography, and the other is blockchain. Cryptography is a way of encrypting readable data into a cryptic form, making it unintelligible for users or systems that do not have the decryption key.
- The data is converted into a secure code called the hash function, a fixed-length code with all the information from the original input.
- The encryption is such that it has two levels of decryption in the form of public and private keys.
- The public key is available to everyone who has access to the data, while the private key is unique to the owner of the data in question. Only when both these keys are used can the data stored in the hash function be unlocked and used.
- If the private key is somehow lost or forgotten, there is no way to unlock the encrypted data. The encrypted data will always be there but can never be accessed.
- There can be different protocols for encrypting data. The one used by Bitcoin is called double SHA-256.
Blockchain is a digital ledger of transactions that follow the rules defined by the source code to behave and interact. The input data is usually transactions, which are stored securely on the blockchain and are immutable. Blockchain technology uses the hash function to store data and link it in a chain by connecting multiple blocks. The blocks are formed by the consensus of members in the network through a process known as verification. For this process, the network members (nodes) check the proof of transaction and confirm that the transaction has occurred. This leads to acceptance of that transaction, and the chain continues.
There are instances when some people in the network do not agree with the consensus and tend to move the other way. When such disagreement happens in an open-source, public blockchain, there’s a possibility of two situations.
- One is the formation of a soft fork. This happens when the majority of the miners agree with a new software protocol and form a new chain, invalidating some of the previously verified blocks and making them stale. This leads to some nodes upgrading to follow new rules and verify the blocks that follow these new rules until they do not merge with the old rules.
- The other is the formation of a hard fork. This is a revolutionary situation wherein all nodes are required to follow the new rules to continue the blockchain. This radical change triggers the formation of two parallel chains where one follows pre-fork protocols. At the same time, the dissatisfied lot begins to pursue a new system protocol that suits their idea of blockchain functionalities.
The mechanisms discussed above are the technical aspects that control the implementation of blockchain. These protocols allow for the technology to be decentralised and inclusive. Cryptocurrency is the tokenisation of the transactions on the blockchain to represent a value associated with those transactions.
What is the Importance of Cryptocurrency?
The groundwork for modern cryptocurrency was laid long back, in the 1980s, by David Chaum’s “blinding” algorithm. Wei Dai later followed this up by creating an architecture for digital currencies called “b-money”. The primary aim behind all of these efforts was to break away from the shackles of finance intermediaries. Following are the reasons why:
- The transactions stored on blockchain are linked to anonymous addresses. It is hard to trace the address to an individual, which makes the ledger anonymously transparent.
- Every penny that’s ever bought or spent is accounted for on the digital public ledger. There’s no leakage in the system, which makes the system resilient.
- There is a lag in the actual transaction time and when it’s stored in the ledger. There is no risk of double spending in cryptocurrency, as is the case in conventional bank transfers because the tokens are stored in an escrow account until they are verified. This amount is out of the control of any party to the transaction and is locked until the transaction gets verified.
- There are no transaction fees for transfers across national boundaries, making it a mode of choice for cross-border remittances.
- The value of cryptocurrencies, although highly volatile, are speculated by actual users of the currency. This balance of demand and supply makes its value authentic and essentially free from manipulation.
Final Thoughts
Cryptocurrency is a disruptive trend created by Satoshi Nakamoto, which has transformed the concept of money for millennials and the generations that follow. The world of change is here to embrace.