Demystifying Cryptocurrencies and Blockchain Technology
19 Feb 2018 | Back to Blog
Cryptocurrencies have been the stuff of global conversation, speculation and entrepreneurial adventure for some time now. A lot has happened since the genesis of Bitcoin in 2009, and, although cryptocurrencies haven’t taken hold in Jamaica yet, they, and the underlying blockchain technology, have already disrupted the way digital transactions are carried out and secured. If you’ve heard about Bitcoin, but are still wondering what it is, keep reading.
Bitcoin is easily the most popular cryptocurrency right now, but there are other digital currencies using similar technology. Ethereum and Litecoin are two more examples. A cryptocurrency is a purely digital form of money that has its creation and transactions governed by cryptography instead of a central authority. The coins can be traded peer-to-peer without the need for a central intermediary. Online platforms, called exchanges, allow for the buying and selling of coins, providing a gateway for users to move between the traditional financial system and the cryptocurrency space. The best way to explain it might be to first show how it works.
Once a transaction is requested, it is recorded then broadcast to a network of computers, or nodes. The statuses of both user and transaction are verified by the network. Once verified, the transaction is time stamped, combined with other transactions and added to the ledger as a block of data. Each block is encrypted and linked by code to the last block of transactions, creating a permanent chain – the blockchain. Once the new block is added to the chain, the transactions are complete.
The network of nodes is a group of computers all running algorithms using the same rules that together verify both the users and each transaction through consensus. Traditionally, this kind of verification is done by a central authority, like government or credit card clearing house. The consensus structure also means that no individual or small group of users can make changes to defraud the system, as all the other computers will detect the discrepancy. For their role in the cryptocurrency ecosystem, the nodes are rewarded by the generation of newly created coins and transaction fees. This process is also called mining.
A blockchain is essentially an open and publicly accessible ledger, which contains all the transactions ever recorded and is continually growing. Hashing takes the data in a block and uses it to create a unique string of data called the hash. Data from the previous hash is linked to the current hash, creating the link between blocks, which forms the blockchain. This feature prevents any single block from being changed without affecting the whole chain, and is part of the blockchain’s unique security system.
The innovative methods of verification and storage employed in blockchain technology are applicable to other types of transactions as well, like contracts, supply chain tracking, peer-to-peer payment services and personal identification just to name a few.
The blockchain’s open source consensus system decentralizes ownership of the verification process, driving costs down and democratizing digital currency. This adds to the security and trustworthiness of the system, lowers fees for users and speeds up transactions.
However, cryptocurrencies and blockchain tech are still maturing. Widespread adoption by businesses and individuals has not yet been achieved. The processing of transactions is still thousands of times slower than that of credit cards, though developers are currently making strides in that area. And, because, the total value of the currencies in circulation is relatively small, it is still a volatile market easily affected by events, trades and business activities.
Drawbacks notwithstanding, Bitcoin and Ethereum have a combined market value of roughly US$250 billion. There are also another 60 coins with market capitalization levels starting at US$100 million with twenty of them currently valued above $US1 billion. Last month Litecoin alone logged over 197,000 transactions in one day.
Nine years into this new era, Microsoft, Paypal and Subway among the growing number of big companies on board with cryptocurrency. Maersk, FedEx and Walmart are just a few of the pioneers using blockchain to drive their supply chain. There are a number of blockchain companies being traded on the US stock exchange. It’s clear that whatever lies ahead for the evolution of blockchain tech and cryptocurrencies, they are no longer merely disruptive, they are here to stay.