LONDON (Bywire News) -
Much has been written about cryptocurrencies and the blockchain. Many see these as technologies of the future, but they are much misunderstood. Here’s a kind of digital 101 to give you the basics about both.
What are cryptocurrencies?
Cryptocurrencies are a digital form of currency. Like regular money, they can be traded and used to buy goods or services, from those outlets which accept them. However, they do not exist physically and are not issued by a central bank.
How were cryptocurrencies created?
People have been trying to create digital currencies since the 80s. However, it was not until October 2008 that they were successful, when a white paper appeared on a cryptography mailing list entitled “Bitcoin: a peer-to-peer electronic cash system” under the name of Satoshi Nakamoto. Little is known about who Satoshi is, but they created the Bitcoin software as open-source code and released it in January 2009. Nakamoto created the genesis block of Bitcoin and the rest is history.
How do cryptocurrencies work?
Cryptocurrencies work using distributed ledger technology which consists of a network of computers or nodes which verify each transaction. Unlike conventional currencies, there is no centralised control - the community takes responsibility for verifying all transactions.
This solves a key problem with the creation of digital currencies: how to manage the issue of control. In a conventional centralised system, what’s to prevent the person or group in control of abusing the system for their own profit? With a decentralised blockchain, control passes to the network and all transactions are publicly available and time stamped.
How many cryptocurrencies are there?
Many. The success of Bitcoin encouraged others to follow. There are thousands, although some are more successful than others. The biggest rivals to Bitcoin are currently Ethereum, Ripple, Libra and Cardano. However, Bitcoin retains a dominant position in the market.
Can I exchange them with regular money?
Yes. Cryptocurrencies can be exchanged with traditional (fiat currencies) as well as other cryptocurrencies. There is a busy trading market with people trading crypto in much the same way as others trade forex.
How can I exchange cryptocurrencies?
Cryptocurrencies can be traded on cryptocurrency exchanges. Depending on the type of exchange, you can swap them for other digital currencies or traditional currencies such as the dollar. You will use a digital wallet which stores, sends and receives the cryptocurrency in much the same way as you might use a physical wallet to store cash.
What are they worth?
According to CoinMarketCap, the total value of cryptocurrencies was over $2tril as of September 2021. The market is highly volatile. Individual cryptocurrencies are worth different amounts and regularly experience high rises and falls. This makes them an attractive option for investors who are willing to shoulder substantial risk for the prospect of high returns.
I’ve heard the term altcoins. What are they?
Altcoins refer to any cryptocurrency which is not Bitcoin. They include more established names such as Ethereum and Ripple, as well as much smaller new entrants.
What is a stablecoin?
Some cryptocurrencies are designed to minimise volatility. These stablecoins link their price to a more stable asset such as gold or a fiat currency.
Are cryptocurrencies the same as digital tokens?
Not quite, although the term is used interchangeably. Essentially, it’s the same difference as between tokens in the real world such as casino chips and real money. While the former can be exchanged for services and for money, it cannot be used to buy stuff in the same way as cash. Digital tokens are virtual versions of the same thing. They are often issued by online retailers as loyalty rewards, or by companies looking to raise capital through crowdfunding exercises.
What is blockchain technology?
The blockchain is a decentralised database distributed across a network of computers. Blocks are created in a chain with each one containing a record of a transaction with a unique hash. This record will be stored on all computers in the network.
Where is the data stored?
Data is stored on a block on a public ledger. Every computer in the network will contain a copy of that ledger. If a block is changed, a copy must be sent to each computer (or node) in the network.
If the information is public, where can I see it?
Each blockchain will have its own explorer where you can view all the information about transactions.
Who owns the blockchain?
Nobody! That’s the whole point. This is a decentralised system which is run by its users. In much the same way as nobody owns the technology which controls email, you can also use the tech to create your own blockchain.
What are nodes?
Each blockchain is a network consisting of nodes, or computers, which have a copy of each block. These computers must algorithmically approve any newly mined block for the chain to be accepted.
How does the network create the blockchain?
Each chain consists of multiple blocks which have three elements: the data, a 32-bit number called the nonce which is generated when a block is created, a hash which is a unique identifier wedded to the nonce.
New blocks are created by miners who use software to solve the complicated mathematical problems of finding a nonce which generates an accepted hash. Once a block has been successfully mined the computers in the network accept the change and the miner receives a reward.
Is it really unhackable?
The blockchain is often described as unhackable. This is not entirely the case - but it is much more difficult. With a conventional database, control is centralised. Hackers target that central control. The blockchain, however, is decentralised which means it’s much harder to hijack. Hackers would have to take control of the validation process to take over the network. For that they would have to gain more than 50% of its total computing power. Attacks on blockchains have happened before in which hackers have attempted to take control of the hash power.
Is the blockchain the same as Bitcoin?
No, although they are often mixed up. Bitcoin is a cryptocurrency, while the blockchain is the technology it runs on. The blockchain on which Bitcoin runs is just one of many different blockchains.
What’s the difference between public and private blockchains?
A public blockchain is open to everyone. Anyone can download the protocol and read, write or participate in the network. Transactions are recorded on the public ledger, time stamped and validated before they can be written into the blockchain.
A private blockchain is invitation only and is governed by a single entity. This allows organisations to make use of the technology without making it public. Entrants to the network require permissions to read, audit or write the blockchain. There may be several levels of access.