Blockchain and Cryptocurrency FAQs
We answer the most common questions about the blockchain and cryptocurrencies.
Much has been written about cryptocurrencies and blockchain. Many see these as technologies of the future, but they are very much technologies of today. Here is a kind of digital 101 to give you the basic run down on 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.
Daniel Larimer, the creator of EOS, recently commented the following:
In July 2010 I predicted that Bitcoin would eventually only be viable for bank-to-bank settlement because of scalability constraints. Now bitcoin payments less than $500 are more expensive than credit card fees. "If you don't believe me or don't get it, I don't have time..."
Taken from Twitter.
How were cryptocurrencies created?
People have been trying to create digital currencies since the 80s. However, it was not until 2008 that they were successful. In October ‘08, a white paper appeared on the cryptography mailing list entitled: Bitcoin: a peer-to-peer electronic cash system under the name Satoshi Nakamoto. Little is known about who Satoshi was, but he, she or 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, with the community taking 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, EOS, Libra and Cardano. However, Bitcoin retains a dominant position in the market.
Can I exchange crypto with regular money?
Yes. Cryptocurrencies can be exchanged with traditional (fiat currencies) as well as other cryptocurrencies. There is a busy 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 CoinMarket Cap, the total value of cryptocurrencies was $879.3bn as of January 2021. The market is highly volatile. Individual cryptocurrencies are worth different amounts and regularly experience big gains and retractions. This makes crypto 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 such as EOS or Wirebit.
What is a stablecoin?
Some cryptocurrencies are designed to minimise volatility. These link their price to a more stable asset such as gold or a fiat currency such as the dollar.
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 (i.e., outside of the Casino in this example). Digital tokens are typically the child tokens of a cryptocurrency. They are often issued by online retailers as loyalty rewards, or by companies looking to raise capital through crowd funding exercises, made famous by the initial coin (ICO) offering frenzy of 2017/18.
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. (Assuming the blockchain is making use of the proof-of-work (PoW) cryptographic zero-knowledge proof)
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. Explorers are just websites that are connect to the live blockchain network and allow users to search for and view transactions.
Who owns the blockchain?
Nobody. That’s the whole point. Many blockchains are decentralised systems which are run by its users. In much the same way as nobody owns the technology which controls email you can also use it to create your own blockchain. However, obviously, corporate run blockchains, just like corporate run email clients, are owned by those private corporations. Blockchains that run crypto like Bitcoin, are not owned by any person, group, or corporation. They are decentralised, which means they exist in many different locations at the same time, with consensus key to ensuring data integrity.
What are nodes?
Each blockchain is a network consisting of nodes, or computers, which have a copy of each block of transactions. These computers must algorithmically approve any newly mined block for the chain to be accepted, in the example of PoW.
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, often trying passwords or backdoors with brute force until they buckle. 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 51% of its total computing power, something which is almost impossible on a decentralised network. Attacks on blockchains have happened before in which hackers have attempted to take control of the hash power. As blockchains continue to be invented, not all utilise the PoW or even the more modern Proof of Staking process. This means that many poor constructed blockchains will be hackable, just like databases.
Is the blockchain the same as bitcoin?
No, although they are often mixed up. Bitcoin is a cryptocurrency while the blockchain is an example of the technology that records the Bitcoin transactions. The blockchain on which Bitcoin runs is just one example of many different types of 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. An example of a public facing web platform run on a private blockchain, would be Voice.com.
(Written by Tom Cropper & Michael O'Sullivan)