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Blockchain, Bitcoin and Crypto Explained

Sometimes people group Blockchain, bitcoin and cryptocurrency together and blend the terms, which can create confusion. The following article will help you to distinguish between the three and also point out the differences between blockchains and databases.

What’s more, there are different applications for blockchains. Not all have to do with money or investing as you will soon discover.

Blockchains

Although bitcoin was the first application relying on blockchain technology, blockchain itself can be used for other purposes. But first, let’s discuss what a blockchain actually is, how it works and what problems it solves.

Simply put, a blockchain consists of a chain of blocks that each contain three different elements:

  1. Information
  2. Something called a “hash”
  3. The hash of the previous block

Thus, the name blockchain.

The kind of information or data stored in a block depends on the type of chain to which it belongs. If we take bitcoin as an example, the underlying blockchain stores bitcoin transaction records, including the amount of coins sent as well as the initiator and the receiver.

Every hash in a blockchain is unique. It identifies a specific block and is based on the data this very same block contains – similar to a person’s fingerprints. This is why a hash can only be calculated after the block itself has been created. If the information inside a block changes, the hash will change automatically.

This mechanism makes it easy to detect when someone has tried to interfere or tamper with a block. How? By simply comparing the hashes of two consecutive blocks. For example:

Let’s say the hash for block #10 in our imaginative blockchain is “1234.” Remember, this information is stored in the block itself and in the next block – #11. As we already know, if we change the information in block #10, its hash is also going change. All of a sudden, the hash doesn’t say “1234” anymore but maybe “1423.” Now the hash for block #10 stored in block #10 and #11 differ from each other. As a result, block #10 and all following blocks are considered invalid.

Hashes are one of the elements that help to make a blockchain more secure. But this is not the end of the story.

What Makes Blockchain Special

Unlike a regular database, the information inside a blockchain is almost impossible to manipulate.

For one, this has to do with the hashing mechanism used to identify blocks. However, the processing power of modern computers is so fast that they can calculate thousands of hashes in a single moment. If a hacker would change one block in a blockchain and also recalculate all the hashes of subsequent blocks, the chain would be revalidated – at least in theory.

This is where the proof-of-work concept comes into play. The proof-of-work concept slows down the creation process of new blocks. In order to create a new block, a cryptographic puzzle must be solved. Once a computer has solved the puzzle, it shares the solution with every other computer (or peer) in the blockchain network. These need to verify the solution and thus a new block is added to the chain. This is what builds trust in the data.

The benefit is that no intermediaries such as banks are needed to verify any information, which saves time and money. Depending on the blockchain, creating a new block might take a couple of seconds or a couple of minutes.

The third and last element that blockchain technology uses to improve data security is decentralization, as opposed to relying on one centralized entity that controls everything. As mentioned above, blockchains use peer-to-peer (P2P) networks that verify a new block as soon as it has been created.

Each peer owns a full copy of the blockchain. Ultimately, the majority decides which blocks are valid and which ones are not. In other words, not any one individual can successfully change a block that is part of a blockchain unless they own more than 50% of the entire P2P network.

Smart Contracts

The addition of smart contracts represents a recent development in blockchain technology. Smart contracts are programs stored in blockchains that can be used for coin exchange and financial transactions, but also to collect taxes, store medical records and land titles, and much more.

A blockchain is either open to anyone to view and access (public blockchain) or to a defined group of authorized peers (private blockchain). An example of public blockchains is cryptocurrencies. Companies or government agencies can use private blockchains for internal data storage.

Databases Versus Blockchains

As we already discussed, if you want to change any of the information contained in a certain block of a blockchain, it’s not possible to change the block itself. Rather, you add a new block to the chain recording the information change. It’s a nondestructive way to track data changes over time.

However, there are many scenarios where using a database makes more sense than using a blockchain because the latter also has its downsides:

  • Regular databases are controlled in terms of who can read and edit them, whereas blockchains can only be edit-controlled.
  • Tremendous processing power is required to generate and verify new blocks in a blockchain, no matter how advanced the technology.
  • By their very nature, blockchains will always be slower than regular databases.

According to Gideon Greenspan from multichain.com, “If trust and robustness aren’t an issue, there’s nothing a blockchain can do that a regular database cannot.”

Bitcoin and Other Cryptocurrencies

Bitcoin was developed by Satoshi Nakamoto, a pseudonym used by one person or group of people who are considered the creators of the first digital cryptocurrency. Since then, hundreds of other cryptocurrencies, also called “altcoins,” have entered the market. The most popular are ethereum, ripple, bitcoin cash, EOS and litecoin.

Blockchain technology will change how we interact with each other. Its main purpose is to securely store information that can’t be tampered with. Bitcoin and other cryptos are only one application of this new innovation.

Recent articles by Marguerita M. Cheng: An Introduction to Asset Allocation

The post Blockchain, Bitcoin and Crypto Explained appeared first on NewsWorld.



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