A blockchain is an encrypted, immutable ledger that continuously generates new “blocks” filled with data. The chain evolves using complex algorithms. Data can be stored on a blockchain, which keeps a permanent record of all transactions that have ever interacted with it, as well as the date and time they occurred. Transactions are finite, verifiable, and thought of as much more secure than traditional ledgers. What attracts people and businesses to blockchain is its “trustlessness”. Since no central human authority (such as a bank or government) has control over the ledger, it removes human error and foul play from the list of possible outcomes. The blockchain has set the precedent for many other applications and industries that may be streamlined and made more dependable using blockchain technology.
What is a cryptocurrency?
A cryptocurrency is a digital currency that uses a blockchain as its official ledger. For example, just like how banks in the United States will use their own ledgers with United States Dollars as their currency of record, so too will blockchains use their specific cryptocurrency as their currency of record. So the Bitcoin blockchain is the public ledger that stores all Bitcoin transactions, the Ethereum blockchain is the public ledger that stores all Ethereum transactions, and so on.
How does a cryptocurrency transaction work?
Each user of a blockchain, or “network”, will hold what is called their private key. The private key is the code needed to access your funds stored on the blockchain. This code is given out when the wallet is created, and should be kept secret, as anyone with this code will be able to access your funds. Many blockchains vary in how transactions are executed, but all follow the same general premise. The public key is the public address that is used to receive a transaction.
Say I want to send some cryptocurrency to my friend. My friend will send me his public address associated with his wallet. I will open up my wallet, input his address, and denote the amount of currency I would like to send him. When I send the transaction, “miners” or “validators” of the network will use their computing power to solve a mathematical problem that proves that the transaction is authentic. Once the majority of nodes on the network verify the transaction, it is then added to a block on the blockchain, and the transaction is confirmed. The transaction is now set in stone, and nothing can change it. My friend will receive the funds I sent, minus the small fee that is paid to the miners in exchange for their service.
Note: Each blockchain uses their own public and private keys. So Ethereum addresses cannot receive Bitcoin, and vice versa.
What makes this so significant?
There are numerous reasons why blockchain and cryptocurrency are important evolutions in the financial system. The primary two are that this creates a trustless medium of exchange, and that it creates a publicly verifiable and easily auditable monetary base.
Our current financial systems are backed by nothing but trust. Individuals trust institutions to do what they are supposed to do, the problem is that we see time and time again that these institutions violate our trust for personal gain. Not one month goes by without some major headline about financial institutions defrauding their investors or stealing from their clients. Blockchain technology will forever change the way we are able to trust financial institutions by making it nigh impossible to execute the same schemes that have been plaguing our society for far too long.
Blockchain and cryptocurrencies are backed by the principle of decentralization, meaning no one single entity has control over how the networks operate. Instead, the networks operate according to how their code is written, and nothing will be able to change or influence that without exerting an unrealistic amount of time, money, and energy.
Blockchains and cryptocurrencies operate 24/7, there are no business hours, there are no middle men. They operate continuously and in a secure manner.
Is there any mainstream interest in blockchain and cryptocurrency?
Yes. Currently institutions such as Earnst & Young, Microsoft, IBM, and Samsung have all begun to incorporate blockchain technology into their current and future business plans.
What are the downsides?
Blockchain technology and cryptocurrencies are still in their infancy, and closely resemble the early days of the internet. There’s a lot of hype that not a lot of people understand, and the user experience is not very user friendly for those who do not have at least a moderate understanding of how the systems operate on a technical level. Currently, there’s an enormous amount of uncertainty and information asymmetry even for those who are heavily involved in the space. There is also a significant number of scammers looking to take advantage of the early cryptocurrency markets which makes being vigilant and doing research an essential part of investing in cryptocurrency.
Types of Cryptocurrencies
Not all cryptocurrencies are the same or serve similar purposes. You should think of cryptocurrencies like websites on the internet. While they all function similarly using the same underlying technology, no two of them are exactly the same. Below we’ll briefly go over the most common functions cryptocurrencies can address.
Peer to Peer Currencies (P2P)
Peer to peer cryptocurrencies are specifically designed to function in an identical manner to how cash is currently used in the present financial system. These are intended to facilitate everyday and routine payments.
Examples: Bitcoin, Litecoin, Nano
Privacy coins are cryptocurrencies designed to protect the users’ privacy by making transactions not publicly viewable.
Examples: Monero, ZCash, Dash
Stable coins are cryptocurrencies designed to be pegged in value to real world fiat currency.
Examples: Tether, USD Coin, DAI
Decentralized Application Platforms
Also known as “DApp platforms” or “Smart contract platforms”, these are the most robust forms of cryptocurrency. These platforms allow users to write code onto the blockchain that allow the blockchain to execute programs that function with the same benefits as the underlying blockchain itself.
Examples: Ethereum, Tezos, EOS
These platforms focus on creating the ability for blockchains to interact with each other in a similar way to how the internet allows networks to interact with each other.
Examples: Cosmos, Chainlink, Quant
These tokens are designed to fulfil a very specific purpose, like reduce trading fees, or to facilitate governance.