In its most basic form, Cryptocurrencies are a type of digital currency. If seen as a medium exchange, it’s almost similar to other fiat currencies such as the US dollar except that cryptocurrencies are virtual. Cryptocurrencies get their name from cryptography, and they use cryptography to secure and verify transactions, as well as to regulate the creation of new currencies. Cryptocurrencies come with a limited supply, and one can compare them with a limited number of entries in a database. Like all other secured databases, no one can alter the supply of cryptocurrencies, in any way or form, unless some specific conditions are met.
What is Cryptography?
Cryptography is a specific type of encryption technology that uses an algorithm and a key to transform a plain-text input into an encrypted output, known as ciphertext. The purpose is to enable secure communication in the presence of ‘adversaries’ or malicious third parties. Since cryptocurrency is unregulated and no centralized authority, like banks, authorize them, the use of cryptography secures the peer-to-peer transactions.
The history of attempting to devise a secure digital currency dates back to the early 90s. But it was only in 2009 that an anonymous developer or a group of programmers under the name of Satoshi Nakamoto developed Bitcoin. Though they had described it as a “peer-to-peer electronic cash system,” it soon became the world’s best-known cryptocurrency, a position that bitcoin holds to date. It is for Bitcoin that blockchain technology was first-ever developed. Nowadays, blockchain technology has become the basic building block of all cryptocurrencies.
What is Blockchain Technology?
Blockchain implies a decentralized ledger. All transactions happening on the peer-to-peer network gets recorded in this ledger. Since the ledger is decentralized, there is no provision or requirement of a central authority validating transactions. The participants of the network can themselves confirm the transactions. However, the process of confirmation is not arbitrary. We would look into the steps involved in the process in greater detail in the next segment. The applications of blockchain technology include the transfer of funds, settlement of trades, voting, etc.
How Blockchain Technology Works: A Step-by-Step Guide
To begin with, a user requests a transaction.
The requested transaction is broadcast to the Peer-to-Peer network, which consists of nodes. These nodes are nothing but computers.
The network of nodes uses a known algorithm to validate the transaction as well as the user’s status. A verified transaction may involve cryptocurrency, contracts, records, or other types of information.
Once a singular transaction is verified, it is combined with other similar ones to form a block. The block serves as a new dataset for the ledger.
The newly created block is then added to the already existing blockchain.
Once added, the block or the blockchain can not be altered in any way.
With the adding of the block to the blockchain, the transaction gets over and the user gets to know the transaction status.
There are several benefits of using blockchain technology as the building block of the cryptocurrency investments. It offers increased transparency, accurate tracking, permanent ledger, and cost reduction.
Since the development of Bitcoin, the world of cryptocurrency has grown by leaps and bounds. Although it’s still not comparable to the expanse of fiat currencies, it’s no mean feat what it has achieved in just 11 years, since the launch of Bitcoin.
The Present Stage of Cryptocurrency Technology
Since the launch of Bitcoin, the total number of Cryptocurrencies has grown to a size of more than 6,900 varieties. All these cryptocurrencies together occupy a market size of almost $325 billion.
With the expanding market, the world of cryptocurrency has gone through major technological evolutions. Big technological companies are gearing up to offer Blockchain as a Service. Federated blockchains, where multiple authorities can control the pre-selected nodes of the blockchain, are gaining momentum. To deal with the price-volatility issue of cryptocurrencies, stablecoins are gradually appearing as key players. Interoperability or the ability to share data and relevant information across multiple blockchain systems and networks is surging as a trend. Modern technological provisions related to artificial intelligence and the internet of things are also getting explored increasingly to make cryptocurrencies more viable, user-friendly, and secure.
Altogether, with the increasing penetration of the ‘digital’ or the ‘virtual’ in our daily lives, it would be interesting to see whether and how cryptocurrencies gain more dominance in the days to come.