Bitcoin, a type of digital currency created in 2009, has become a hot commodity. With volatile bitcoin prices around the globe, this cryptocurrency has distracted investors from the story about its underlying technology. Even though blockchain technology is nearly 10 years old — referred to as the most transformative technology since the internet and is responsible for spurring billions in private investment — it remains a mystery to many Americans.
Here’s what you need to know about blockchain and its potential to change the future of financial transactions forever.
What Is Blockchain?
The fancy blockchain definition is that it’s a digitized decentralized, public ledger for transactions. The easier description is that it’s a permanent, shared record book — known as a digital ledger. This database tracks transactions and creates consensus about the data’s validity. Every new transaction becomes a new item in this record book.
In the past, traditional databases had one master transaction log. Because data can be duplicated or forged, however, every transaction requires constant updates by trusted parties. The regularity of these updates demands time and support staffs to process them.
How Does Blockchain Work?
Here’s blockchain explained: Blockchain eliminates the need for central recordkeeping. Because the ledger is made public, everyone involved can easily gain access.It’s a transparency that serves to accelerate the verification process, reduce the need for back-office functions and promote security.
Security of Blockchain
Every transaction requires a security measure to protect the identities of transacting parties. To secure transactions of bitcoin and other cryptocurrencies, two keys are required — a private and a public key.
The public key is shared permanently in the log. It can be used to sign and encrypt a message. The private key is only known to users and acts as a pin code. A recipient uses this key to decrypt a transaction.
The combination of these two keys creates a digital signature. When you use your public key, a person can send you bitcoin. The currency is then locked in a digital safe — called a block — which can only be unlocked by the private key.
When you add up all these digital blocks chronologically — and all of the corresponding transactions — it builds what is known as the blockchain. In addition, this ensures that anyone using the blockchain can verify a transaction record across a peer-to-peer network rather than just a central authority.
The Blockchain and Bitcoin
The blockchain was the primary innovation of bitcoin transactions after the cryptocurrency’s invention in 2009. Given that the cryptocurrency bitcoin is not managed by a central bank like the Federal Reserve, it was critical to provide a method to ensure trust and scalability of bitcoin transactions.
Cryptocurrency is not truly designed to be an investing asset. It is actually the compensation received by individuals who verify transactions on the blockchain.
For example, on the bitcoin network, someone who is a bitcoin miner receives bitcoins as a reward for adding and verifying transactions, which reduces the need for third parties to process transactions. Once a transaction is publicly recorded into a new block, and ultimately attached to a blockchain, a new secure block is formed.
Why Does Blockchain Matter?
Blockchain matters for many different reasons. Here’s why:
One key reason why cryptocurrencies and blockchain exist is to address certain inefficiencies in the current banking system. For example, when someone transfers money overseas, significant delays can exist for the recipient due to the verification process.
A bank must process a cross-border payment. The bank — as the clearing mechanism — will take a cut of the transferred money. The blockchain enables payment processing without needing a traditional middleman, which can reduce the associated processing costs.
The second value of the blockchain is that it ensures greater security. Because counterparties no longer require third-party processing, users are less likely exposed to data security and privacy concerns.
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Blockchain is not-hack proof, but the decentralized nature ensures that no single entity can get control of the cryptocurrency and its corresponding blockchain. That said, hackers can hack into exchanges responsible for the buying and selling of cryptocurrencies.
As noted, financial institutions face delays when engaging in global transactions. Blockchain, however, enables transaction validation 24/7/365.
Other benefits exist with blockchain. Accuracy, transparency and traceability are a few. In order to discover the value of these potential benefits, many companies, governments and central banks are testing blockchain technology.
Even though it has been around for almost a decade, investors are expressing significantly more interest in the space. With that in mind, mainstreaming blockchain would require a dramatic overhaul of networks and systems. Expect the hype to continue into the next decade.