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Blockchain Explained – A Simple Description of the Blockchain Technology


Blockchain is a digital ledger. Its transactions are publicly recorded. It is simple; it maintains trust, openness, and also takes the place of third parties in transactions. Marc Kenigsberg described blockchain, saying, “Blockchain is the tech. Bitcoin is merely the first mainstream manifestation of its potential”.

Cryptocurrency is from two words, namely “crypto” and “currency,” which means digital encryption and a system of money, respectively. So, in simple terms, cryptocurrency is a system of money on a digital network. E.g., Bitcoin. It is a system of money transferable from one computer to the other.

Cryptography is the art of writing and solving codes that make transactions happen. For example, every account has a 34-character address.

Users, however, have private keys which provide personal access.

“The blockchain does one thing: it replaces third-party trust with a proof mathematically of an event that happened,” Adam Draper.

There are different types of blockchain, and each has its pros and cons. In this article, we have explained how it works, its different types, and use cases.

Blockchain

How does the Blockchain work?

The blockchain distributes data over a large group of networks. It records every transaction on it and makes it available using a transaction ID.

Moreover, the blockchain has no central authority nor database. Therefore, it is free from a hack.

Furthermore, you cannot delete control edit any information on it. Ever since the invention of Bitcoin in January 2009, the blockchain hasn’t suffered any failure or error in data. Also, it updates itself every ten minutes.

The blockchain is a decentralized network; by this, we mean that its operations are not at the disposal of just one person. Therefore, whatever happens on the blockchain is a resolve of the community.

Nodes control the blockchain. In fact, nodes are miners who relay and validate transactions.

Miners receive incentives for this task by solving cryptographic puzzles.  And, these nodes make up the administrators of the network.

Types of Blockchain

There are three types of blockchain in the cryptocurrency space namely;

Public Blockchain

Blockchain Technology

A public blockchain is an open source ledger. It is transparent, and every transaction information is available to the public. Miners coordinate and approve transactions. Examples of cryptocurrencies that use public blockchain include Bitcoin, Ethereum, etc.

Many cryptocurrencies which exist in this system implements the proof of work (PoW) model, e.g., Bitcoin. Some others use the proof of stake (PoS) model, e.g., Cardano.

Private Blockchain

A private blockchain is not open source. It maintains the privacy of transactions and transacting parties. Thus, its transaction details are not available to the public.

Members of these networks require consent to participate. It makes use of complex on-chain cryptographic methods to ensure the privacy it offers. A notable example of private currencies is Monero. Other examples are Dash, Komodo, ZCash, etc.

Hybrid Blockchain

A hybrid blockchain is a flexible system that exhibits the features of both private and public blockchains. It allows users to set their privacy feature. Examples of cryptocurrencies that operate on a hybrid blockchain are Dragon chain, XinFin, etc.

Major Cryptocurrencies and Their Classes

Simple Blockchain Technology

Bitcoin

Bitcoin is the leading currency in the cryptocurrency space. It operates on a public blockchain.

Developed by an anonymous person identified by Satoshi Nakamoto in 2009, the advent of Bitcoin spurred the blockchain revolution. This revolution has led to the startup of many crypto tokens, crypto exchanges, which has further helped to increase adoption. Asides trading, another profitable adventure is Bitcoin mining.

Miners are responsible for confirmation of transactions in the network and receive incentives for solving cryptographic puzzles. Examples of crypto exchanges that trade Bitcoin and other alt coins include Bittrex, Binance, Bitmex, Coinbase, etc. There’s been a couple of price correlations in the crypto market lately with Bitcoin hitting a new ATH for 2019 at $8,846.

Blockchain Explained

Ethereum

Ethereum has an open source blockchain distributed computing network which enables smart contracts. It is the 2nd largest network in the crypto space.

Created by Vitalik Buterin, it began trading in the year 2015, and it has grown to be one of the best cryptocurrencies. The Ethereum platform allows for tokens to host their designs on it. The cryptocurrency in this network is Ether, and since it’s a design that employs the proof of work design, mining nodes get the coins as compensation for computations performed within the network.

Litecoin

It is an open source and peer to peer cryptocurrency that is very similar to Bitcoin. It is a decentralized currency that bases its coin creation and transfer on an open source cryptographic protocol. This coin presently has in circulation 55 million LTC and a maximum supply of 84,000,000 while Bitcoin has a maximum supply of 21 million BTC.

Wallets

Wallets are accounts for storing crypto assets. There are a few types of wallets, and depending on involvement in cryptocurrencies; you can make the right decisions on which wallet to use.

Cold Wallets and Hot Wallets

Blockchain Description

Every cryptocurrency wallet available is either classified as a hot or cold wallet. This identity is related to its internet connectivity. A hot wallet works on internet connectivity. A cold wallet, however, is offline storage. Cold wallets are the most secure of the two wallets. Depending on the trading strategy of a crypto investor either as a HODLer or a day trader, cold storage is better for long term holding while a hot wallet is suitable for regular use. E.g., Trezor.

Desktop Wallets

As the name implies, these wallets function basically on laptops and desktop computers. Depending on the available operating system, these wallets have compatible versions. It is easy to use, even if there is no internet connectivity. A quick check on www.bitcoin.org/en/choose-your-wallet helps on how to choose wallets.

Mobile Wallets

These wallets function on mobile devices. Thus, with the availability of smartphones, some wallets are easy to use. Mycellium, Blockchain, and Bitwala are typical examples. These wallets are all available on both Android and iOS. It is important to note also that exchanges provide wallet services in addition to their exchange services. One of the useful features of mobile wallets is its QR code compatibility.

Online Web Wallets

Just like there is cloud storage for documents such as iCloud, Dropbox. Some wallets employ this design also. It is important to note that these wallet providers are third parties. Coinbase is a prominent example of such service providers. Other such wallet providers include Circle, Bitgo, Coinkite, etc.

Blockchain Technology: Applications & Utility Cases

It has many applications in several industries. As a new technology, adoption is the key to realize its full potential. Amongst these includes;

Recording System

It ensures accuracy in digital identity. In crypto trading, every wallet has a peculiar wallet address to it with the private keys to access it.

Moreover, it helps to manage data accuracy between organizations. As an electronic ledger, it offers cheap auditing for various companies across different industries. Finally, it helps to maintain regulatory compliance of different financial markets, thereby reducing money laundering.

Platform

Blockchain technology establishes smart contracts between individuals or companies. A cryptocurrency that illustrates this smart contracting system well is Ethereum, founded by Vitalik Buterin. And, it also offers decentralization as a DAO (decentralized autonomous organization). Thus, it provides a platform for the general public to have active participation in its affairs since there is no central authority.

Presently, a group of banks seeks to build platforms that connect them digitally via a combination of Ricardian contracts & coded business logic. This version of smart contracts would via the information in the blockchain support legal agreements. Some other startups are working on side chains.

Conclusion

Digital relationships have improved with the advent of blockchain. Existing as a P2P network, it introduces trust and transparency to every activity on it. Mostly identified with cryptocurrencies, the blockchain, however, has very many applications. It is also useful for electoral processes.

With increased adoption in financial markets, governments, organizations, the blockchain is an excellent technological tool for growth. To read more blockchain news, and development in the crypto ecosystem, follow this blog for more updates.