What Is Blockchain Technology?
The original blockchain, developed by the mysterious individual (or group) known as Satoshi Nakamoto, was designed to be a virtual ledger used to record online transactions. The ledger itself is open to the public, decentralized, and secured through a process known as cryptography. Once a transaction has been recorded on the ledger, it is combined with other such records to form a singular “block”. Once this new block is formed, it will be tethered to all past blocks in order to form a chain. A typical block will contain the details of the transaction, a time stamp, and a corresponding hash function. This hash function is important because it acts as the link that keeps the blocks together and secures them through an encryption process.
The decentralized nature of blockchain comes from its reliance on a peer-to-peer network. In this network, all active participants (or “nodes” as they’re commonly referred to) keep a detailed record of all blocks added to the blockchain. This means all corresponding nodes host their own copy of the blockchain, preventing any malicious changes made to one node from affecting the entire system. Essentially, once a transaction has been recorded in a block, it would be impossible to retroactively alter that information. In order to alter any single block you would have to make alterations to all subsequent blocks in the chain. Since the blockchain exists on a peer-to-peer network, there would have to be cooperation from all other participating nodes for the alteration to remain permanent.
Uses For Blockchain Technology
The Bitcoin blockchain was created specifically to record the exchange of Bitcoin transactions, in a (relatively) fast, secure, and public way. While the Bitcoin blockchain is the perfect system for keeping track of cryptocurrency transactions, it is not nearly efficient enough to be used for much else. This is where the need for alternative blockchains (commonly referred to as “altchains”) came from.
An altchain is essentially any other blockchain aside from the original one created for Bitcoin. While the Bitcoin blockchain was developed around the idea of cryptocurrency, altchains are built around entirely different concepts. For example, the Ethereum altchain utilizes the framework surrounding Bitcoin’s blockchain but also expands upon it, allowing the Ethereum chain to be far more effective at processing smart contracts (digital agreements that are stored online).
Even with the existence of altchains such as Ethereum, the vast majority of blockchain technology is being used to support cryptocurrency. At this time, there are approximately 1,400 different cryptocurrencies, all of which have their own blockchain or piggy-back off a more established network (such as the Ethereum chain). In the near future however, other industries aside from cryptos and contracts could benefit immensely from this revolutionary technology. For instance, the stock market could leverage blockchain technology to allow for near-instantaneous, secure transactions. Major tech companies are just now beginning to explore the possibilities of blockchain for existing industries. IBM for example, recently partnered with the Performing Rights Society (PRS) and the American Society of Composers, Authors, and Publishers (ASCAP) to develop blockchain technology designed for music distribution.
Bitcoin and Other Cryptocurrency
Bitcoin, along with most other cryptocurrencies, was originally designed to be a digital alternative to conventional forms of currency. By utilizing blockchain technology, Bitcoin could become a completely decentralized currency. Meaning, no central authority could claim ownership over Bitcoin. This differs greatly from other forms of money which can be influenced by large banks and governments.
Being a decentralized form of currency is only one way in which Bitcoin and other cryptos differ from conventional money. Another major difference is in the backing behind the currency. Essentially, all other forms of money are backed by something physical with a high associated value (typically gold or silver). Cryptocurrencies on the other hand only exist digitally, therefore, they cannot be backed in the same way. Instead, all cryptocurrencies are based upon a mathematical function known as proof of work, or “mining” which it is most commonly referred to as.
The mining process begins when a new block is ready to be added to the rest of the chain (roughly every 10 minutes for Bitcoin and every 10 seconds for Ethereum). All active nodes will then compete against one another to finish the encryption process first. The first node to successfully complete this process will be awarded a set amount of cryptocurrency.
Circulation is another important factor for all types of currencies, cryptos included. What differs for cryptocurrency is the circulation limit, or the cap on the total amount of currency that can be mined. For example, as of December 2017, Bitcoin has mined approximately 80% of its 21-million-unit limit. As Bitcoin approaches this circulation limit, mining new Bitcoins will become increasingly difficult. Once that cap has been reached, mining efforts will become useless. Fortunately, different cryptocurrencies have different circulation limits. Ethereum for example has a 230-million-unit limit.
Issues Facing Bitcoin
Aside from potentially running out of cap space to mine new Bitcoins, there are other issues associated with this new form of currency. One of the most pressing issues has to do with escalating transaction fees. Remember when we discussed Satoshi Nakamoto’s vision of Bitcoin being an alternative to conventional currency? Well, due to transaction fees upwards of $20, almost no one is using Bitcoin in this way.
As a result, the few companies that did accept Bitcoin payments have started to refuse it. Citing volatility and transactions costs, Steam, the world’s largest digital game distributor, announced in December that it would no longer be accepting Bitcoin as a form a payment. Others have also followed suit, including the North American Bitcoin Conference. All hope may not be lost however. As Dallas Mavericks owner Mark Cuban has confirmed, the team will begin accepting Bitcoin and other cryptos for the 2018-2019 basketball season.
While just about all major cryptocurrencies saw an explosion in value over the last year, more recently, the trend has been downward. Whether it’s due to stricter government regulation or investor fears of a potential bubble, all cryptocurrencies have seen an almost 50% drop-off in value since the end of December. Though this massive sell-off has since stabilized, the question still remains as to whether Bitcoin, among others, can fully reclaim their historic prices.
While technically not an issue with Bitcoin itself, the apps used to buy, sell, and store various cryptocurrencies (referred to as crytowallets) do have some security issues. One such security issue is the Satori botnet. The Satori botnet is a variation of the Mirai malware, used specifically to target cryptowallets. So far, the malware has successfully stolen over $2,000 worth of the cryptocurrency Ether.This isn’t the first time a hacker has tried to exploit a cryptowallet’s lack of security. However, it is the first to incorporate botnet malware in a hacking attempt. These wallets could also be used to host other things, such as different forms of identity (SSN, driver’s license, passports). So unless the security of these apps can be tightened, you may end up losing more than just cryptocurrency.
As of right now, Bitcoin and other cryptocurrencies share an uncertain future. There are those who believe this latest selloff is just part of the volatile nature of the currency and that the prices will soon recover. Then there are those who believe that the bubble will burst at any moment. Only time will tell which side is right, until then, we’ll just have to wait and see.
Be sure to bookmark our news section for all the latest news regarding Bitcoin, blockchain, and anything else tech related.