This paper was written to provide an entry level understanding of blockchain projects and cryptocurrency. Beginners to cryptocurrency may find it difficult to understand where a digital asset derives its value from. However, by understanding the key properties of digital assets including decentralisation and encryption, and making clear comparisons to the current centralised monetary system, it becomes obvious why digital assets hold such value in our economic system.
It is important to remember that the majority of the concepts within blockchain are not new concepts; however the terminology used to refer to these concepts is unique and sometimes confusing. If you come across new terminology within this paper, be sure to find out what it means, and attempt to compare it to a concept that you are already familiar with. This paper will aim to make these comparisons for you.
Basic introduction to blockchain and cryptocurrency
A major distinction of cryptocurrency and digital assets is that they are engineered under a decentralised distributive ledger. Essentially what this means is the database containing all of the historical transactions and important information about the asset is recorded on a public ledger which anyone can “witness”. All information on this ledger is stored under cryptography, and it is the use of keys and cryptographic signatures that allow sensitive information within the ledger to be hidden or made available to the public.
Let’s compare Bitcoin, a decentralised distributive ledger, to the current banking system which is a centralised and controlled system. In a bank there are employees who are responsible for recording transactions and moving the physical funds between accounts. With Bitcoin you have ‘miners’ instead of employees, which are computers responsible for recording transactions on a public ledger rather than a centralised database. Miners also move the digital funds between cryptographic wallets, as opposed to the physical fiat currency which is moved between banks and storage vaults.
The key difference between these two systems is banking is maintained by human labour, whereas Bitcoin and other blockchain projects are maintained by computers and cryptography. Furthermore, the data in the banking system is stored by centralised entities, whereas with blockchain the data is stored on a public ledger owned by everyone.
Benefits of distributed public ledgers (blockchain)
There are a few major benefits when using a distributed public ledger (blockchain) as opposed to a centralised data base (banking).
- Distribution of data ownership (Trustless)
By using a blockchain to record data, no single entity owns the data and therefore the data cannot be tampered with by a centralised entity. This is because everyone owns a copy of the database, and the database cannot be altered unless a specific number of ‘nodes’ agree for the data to be altered. This includes adding additional data onto the chain of events or even altering the way the blockchains protocols function.
- Time stamped data
Data recorded on the blockchain is time stamped in a chronological fashion. Therefore it is very easy to pinpoint when a chain of events occured. For example, if a blockchain was constructed to record the ownership of land, each block could represent the change in title of that land and therefore a perfect sequence of ownership could be recorded. More importantly it could not tampered with. You could then look back through the blockchain to see who owned the landed at exactly what time period.
- Encryption and security
Through the use of encryption it is possible to secure sensitive information on a blockchain, only for the owner of the cryptographic keys to be able to access it. For example, let us consider how you can ensure no one else can access the Bitcoin that you keep in your Bitcoin wallet. The way this works is when you create your Bitcoin wallet your wallet is allocated a unique private key. This private key, when matched with the public Bitcoin key will unlock the ‘cryptographic puzzle’ to provide you access to your wallet. Hence there is a high level of security via encryption.
- Evolving protocols
If you have ever heard reference to the protocols or the ‘layers’ involved with the Bitcoin blockchain, this is referring to the specific engineering behind the blockchain which makes it unique. For example, some blockchain are engineered to have a high level of privacy; others are engineered to have lighting fast transactions. The beautiful thing about blockchain is these protocols can be evolved and built on top of each other over time. The possibilities of blockchain are limitless.
Governance is what determines the pace at which the blockchain evolves. No one person or entity can make the final decision to make changes to the protocols of a blockchain. The process is achieved in a decentralised way through voting and governance. All projects will have a team of core developers who are responsible for making proposals to the network on what they want to change. These proposals are then voted on, and if accepted the implications will occur at a certain block height. Major changes are called hard forks; minor changes are referred to as soft forks.
- Calculated and transparent cryptonomics
One of the major downfalls of the current fiat currency system is the ability for central authorities to abuse the money mechanism. The most obvious example of this is countries like Venezuela whose government have completely robbed their citizens by printing money to pay off their own debts.
A major advantage of Bitcoin as a universal currency is the transparent nature of its monetary system. There are only 21 million Bitcoin’s; no centralised entity or groups of people can simply print more Bitcoin. As a result we can be confident that our Bitcoin will not become worthless simply due to government or central banks irresponsibly printing money.
There is a reoccurring theme of decentralisation which relates to all of these key benefits. Blockchain’s major asset is approaching data creation and storage in a decentralised way. The possibilities are truly endless with this new technology, and for this reason MiningStore strongly believes that the next 5 years will completely revolutionise supply chain, banking, privacy, gaming and gambling industries.
The blockchain industry is perhaps one of the fastest pace industries to keep on top of. The industry is most certainly still in it’s youthful stages, however it also the most exciting and rewarding stage. I urge anyone reading this article to take this industry very seriously. I am not saying you need to invest in cryptocurrency, I am not saying you need to change the way you live your life. However I strongly suggest that you make yourself aware of the possibilities that blockchain and cryptocurrency hold.
In order to appreciate the pros and cons of blockchain, I strongly recommend you watch the following debate. It is an excellent summary of the pros and cons of blockchain and the likelyhood of Bitcoin becoming the universal currency before any fiat currency. The debate is between Peter Schiff, an American libertarian, and Erik Voorhees the co-founder of a Bitcoin company Coinapult. Take note of the compelling arguments that Erik Voorhees makes with regards to why Bitcoin and cryptocurrency is the future of our monetary system. Of course Peter Schiff also makes some compelling arguments and brings attention to some concerns with cryptocurrency. Overall I think the debate successfully highlights where cryptocurrency is at in its youthful stages and why it should be taken seriously.
Hopefully this article has helped you understand the basics of blockchain technology. If you have any questions regarding how you can use blockchain to improve your daily life or business, feel free to send them to [email protected]
Also, we will be releasing our comprehensive guide, “Crypto for Dummies” with the next month, so stay tuned!