DEEPER DIVE INTO CRYPTOCURRENCIES

Previously, we discussed, from a high-level, what a cryptocurrency is, the history behind it, and its characteristics. If you missed that you can get it here. Today, We will go into more details about this concept called Cryptocurrency, as I promised in the last article. Our focus will be on the technology behind this wonderful invention.

Cryptocurrencies are digital or virtual currencies that use cryptography for secure financial transactions. They are decentralized systems that operate on a blockchain, a distributed ledger that records transactions on multiple computers.

If you remember, one of the intuitions behind digital coins is to take control away from a central authority such as the government, and this is properly called Decentralization. This makes them resistant to censorship and fraud.

According to Wikipedia: “Decentralization is the process by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central, authoritative location or group”.

To any organization that operates on a decentralization concept, the major benefit is that it grants more autonomy or freedom to lower levels.

READ ALSO: AN INTRODUCTION TO CRYPTOCURRENCY

Another intuition behind Cryptocurrency is Transparency. Transparency is the quality of doing something openly without secrets. Currencies operated by countries are unique to them and its development is kept hidden from even the citizens for the purpose of security. The idea behind cryptocurrency is to make their development open to its users (or the world) and still preserve its security. This also helps increase trust.

The technology behind cryptocurrencies that you see today is called Blockchain Technology. Here is where things get interesting and a bit more intense.

Cryptocurrencies use cryptography to secure their transactions and to control the creation of new units. Transactions are recorded on a distributed ledger called a blockchain, which is a record of all transactions that have ever been made on the network.

Blockchain is a shared database that stores transactions between two parties in an immutable ledger. Each transaction is validated, verified, and secured using complex cryptographic techniques before it is stored in a block. A block, according to Investopedia, is a data structure within a blockchain where a transaction data is permanently recorded.

If you wonder what a transaction is, it is a transfer of assets, price, or value from one party to another within a blockchain. In cryptocurrency, it is the transfer of digital coins or crypto money, e.g bitcoin. When a transaction is recorded in a blockchain, details of the transaction such as ownership are recorded, validated, verified, stored in a new block, and then updated across all the nodes.

TYPES OF BLOCKCHAINS

There are primarily two types of blockchains which include:

Private Blockchain

This is a restrictive blockchain that is operative only within a closed network. This type of blockchain is used within an organization or enterprise where only selected members are allowed access into the blockchain. The organization decides how this blockchain operates. They are mostly used for voting, supply chain management, digital identity e.t.c. Two of the most popular private blockchain are Hyperledger Fabric and Multichain. Note that:

• This type of blockchain is not fully decentralized.
• Different types of data are accessed by users based on permissions granted to users.
• They are highly secure, and are not accessed to the public.

Public Blockchain

This is non-restrictive and permissionless and can be accessed by anyone on the internet. Anyone on a public blockchain can read, write, or audit transactions recorded in the blockchain ledger. They are designed to operate democratically and are therefore decentralized since the middlemen and regulators are removed from the operation chain. Public blockchains are basically used for mining and crypto exchanges purposes mostly. Examples are Bitcoin, Ethereum, and Ripples.

There are also other types of blockchain that you can look into such as the Hybrid and Consortium blockchains.

Note that before a transaction can be added to a public blockchain, a decision is made by consensus. Consensus is an agreement between all (sometimes most) of the nodes on the blockchain on the manner of validating the authenticity of transactions and maintaining the security of the underlying blockchain.

Overall, cryptocurrencies are a complex and rapidly evolving field, so make sure to do a thorough research, understanding the risks and potential gain of using them before embarking into it.

If you do enjoy this article and want to learn more about blockchain or even start a career in this revolutionary blockchain technology, do like this article, and leave a comment, your opinion or thoughts below. Shallout!