It’s been almost 10 years after its first appearance, and cryptocurrency remains one of the most debated topics in the cybersecurity space and an emerging career choice for technology professionals. Any mention of crypto coins generates a variety of reactions, varying from scepticism to vibrant enthusiasm to confusion.
Cryptocurrency is an attempt to create a decentralised, secure and democratic structure for online transactions and founded on principles such as peer-to-peer monitoring.
This ambitious project is under constant review. Dedicated protocols and new security measures are needed to enable larger distribution at a global scale.
Cryptocurrency has the potential to lead a revolution in the next generation of transaction systems. To understand this and potentially get involved in the Cryptocurrency industry, you must understand how it works.
Here you can find an overview of the top 5 Blockchain basics that every beginner needs to know before looking into blockchain and cryptocurrency further.
Blockchain explained in 5 points
1. Blockchain is a suite of distributed ledger technologies
Back in 2009, Satoshi Nakamoto identified cryptocurrency as a way to run online transactions without the involvement of any central financial authorities or banking institutions.
This was made possible thanks to the adoption of a suite of distributed ledger technologies, namely Blockchain. In general, Blockchains are made of units called blocks that can record and track anything of value.
All blocks must be connected to each other in the form of a large database, where every change can be recorded, and new information can be safely archived. This way, subsequent information will be piled in chronological order, giving it the shape of a chain.
The adoption of a ledger means that instead of overwriting previous information, different branches are created instead. As a result, blocks can be added at any level of the chain, continuing the information flow in a different direction. By common agreement, the longest chain is also to be considered the correct one.
2. Blockchain is game of Domino
Each block is formed out of three main components:
- Data (i.e. the financial transaction, or any content)
- Hash (a value unique to each block, which performs a mathematical function to output data of a fixed size);
- The Hash of the previous block
When Blockchain is applied to cryptocurrency, the Data of each block contains a single transaction. Whenever a new transaction is executed between two or more users, a dedicated block is created and added to the chain.
However, every other member of the network must give their consent for the transaction to take place (consensus will be explored better in the next point).
Newly generated blocks must possess Data (content, value…), their own Hash (which identifies that block, and that block only), and the Hash of the block it will be attached to – in a way that very much resembles the game of Domino.
If the latter matches the hash of the previous block, then it will be accepted as the new component of the chain.
3. Blockchain is democratic and based on consensus
The blockchain is shared to a widely distributed network of users, whose virtual identities can access and add new content at any time. Such identities are unique, can collect value and send information directly to one another.
Users can add new blocks to the chain by solving cryptographic puzzles. These problems are called Proof of Work. Whenever a new Proof of Work is solved, such solution and correspondent Hashes will be shared with the whole network, leaving them to be verified by other users.
Unanimous consensus is reached if everybody in the network accepts the block as new part of the chain.
This is the revolutionary aspect of Blockchain, when compared to the present financial system: decentralisation is needed as it renders tampering more complicated, while consensus is the key to generate more trust in data. On the other hand, the Proof of Work is necessary to deter service abuses.
4. Blockchain works on encryption protocols
Two main difficulties are met in the management of any Blockchain:
- How can users exchange sensitive information anonymously, while being able to receive the necessary consensus from every other node in the network?
- How can they send information safely and directly to one another?
The answer to both questions lies in the use of encryption protocols. Asymmetric encryption and asynchronous cryptography are key elements that make cryptocurrency a robust and secure mean for information exchange. Blockchain implemented special keys to allow information sharing to specific nodes in the network.
Every account possesses a public and a private key: the former can be read by any users; the latter must be kept secret as it allows specific actions.
When a Sender (A) sends a message to a Receiver (B), this is exactly how the exchange happens:
- A can use their private key to encrypt a Hash, and include B’s public key to the message for exclusive access;
- B can check whether A is the right contact, by decrypting A’s public key and comparing the block’s hash with newly generated one.
This guarantees anonymous and accurate information exchange.
5. Blockchain can be public, private or federated
Blockchain privacy settings vary depending on the purpose of the networks and the position of each user covering within it. Until this point, we covered Public Blockchain protocols, which are open source and based on Proof of Work consensus algorithms.
Bitcoin, Ethereum and Litecoin fall under this category, which means they are open, and anybody can start coding and contributing to the network right after joining.
There is a second group, which contain both Private and Federated Blockchains. They are less common, and there is still open debate on whether they shall be considered real blockchains to begin with.
Nevertheless, their adoption can still bring some advantages such as higher scalability and speed, lowers transaction costs and data redundancies, and larger computing capacity. They also do not rely on the public internet, because they are usually run on intranet or internal servers.
Private blockchains are usually implemented by companies, while Federated ones are mainly adopted by banks and financial institutions. For these reasons, compliance and data privacy rules are very different: identities are known (not anonymous), participants must be pre-approved, and permission is required for both access and coding.
Want to know more?
These are some basic tools everybody should be familiar with before approaching crypto coin on a more complex level. Interested in learning more? Have you ever considered a career revolving around cryptocurrencies, data encryption, cybersecurity and similar fields?