Despite some false starts and bad press, cryptocurrencies are on the rise. But how exactly do these new digital currencies work? And what powers them? The answer lies in blockchain, a technology many will have heard of without fully understanding what it is and how it works.
If you’re interested in investing in cryptocurrencies like Bitcoin or Ether (Ether or ETH is the cryptocurrency of the Ethereum blockchain), you should first familiarise yourself with blockchain. Understanding how the technology relates to digital currencies will help you to better understand how they work, and the risks and rewards involved.
To get you up to speed, we’ve put together a need-to-know guide to blockchain. Use the links below to find the help you need or read on for the full guide.
- What is Blockchain?
- How Does Blockchain Work?
- Why is Blockchain Used for Cryptocurrencies?
- How Safe is Blockchain?
Blockchain is a type of distributed database that stores information in a digital format, sharing it among nodes within a network. The technology plays a critical role in cryptocurrencies, helping to keep digital currencies secure, decentralized, and reliable.
The nature of blockchain technology means that it’s very difficult to hack, cheat or change the system – making it perfect for handling digital currencies. Think of it like a digital ledger, wherein transactions are duplicated and distributed across an entire computer network.
As a standalone facility, blockchain is categorized as a distributed ledger technology, or DLT. This essentially refers to any technology that is managed and monitored by multiple participants, i.e., investors in the case of cryptocurrencies.
Since emerging in the early 1990s, blockchain and its applications have exploded in popularity, with the technology used predominantly in conjunction with cryptocurrencies.
For those not versed in advanced computer tech, blockchain can be difficult to get your head around. But it’s certainly worth gaining an understanding of how the technology works, so you can approach cryptocurrency investment with greater confidence.
The primary goal of a blockchain is to keep the information contained within safe, secure, and incorruptible. Because the technology uses duplication and distribution to safeguard data, it’s almost impossible to tamper with, as would-be hackers would need to change every block of data within the chain – an improbable undertaking.
To help you understand the benefit of using blockchain to support digital cryptocurrencies, here’s a brief analogy. Say a company operated over 1,000 servers from a single location, using them to store business-critical data. While they would enjoy full control and ready access to each server, there is one major weakness: the data is at risk from external problems that jeopardize its integrity and security.
Because a blockchain duplicates and distributes data across a global network, there’s no such single point of failure. Instead, the information is secure, safe, and mobile, accessible by all invested parties but not exposed to external influences and threats.
From a cryptocurrency point of view, blockchain is essential in maintaining the currency’s value and security. And as a blockchain gets longer, it only gets more secure, which is why well-established digital currencies such as Bitcoin are so valuable and in demand.
To further inform your understanding of blockchain, here’s a breakdown of how a cryptocurrency blockchain transaction happens in practice.
- When an investor buys, sells or trades cryptocurrency, a new transaction is entered in the blockchain.
- Details of the transaction are transmitted to a peer-to-peer network, distributed to computers and servers all around the world.
- From here, the network uses algorithms to solve complex equations relating to the transaction, confirming its validity and accuracy.
- After confirmation, the network clusters these transactions into blocks – hence the term ‘block’
- Next, these blocks are ‘chained’ together, resulting in a complete history of all transactions within a single blockchain.
- After which, the transaction is finalized and complete.
Cryptocurrencies rely on blockchain. But why is the technology such a good fit for digital currencies? Let’s take a look at some of its key attributes and capabilities.
- Network-wide transparency – when a new investor buys into an existing cryptocurrency blockchain, they’re granted access to the chain’s ledger, which details transactions old and new. This is important for transparency and trust, helping to maintain the currency’s perceptible value.
- Anonymous – the personal details of individual investors are kept private and anonymous within the blockchain, further enhancing security and data protection.
- Irreversible changes – once a transaction is submitted to a blockchain, it cannot be changed or amended. This improves accountability and security, while ensuring accurate and complete data logs.
- Time-stamped data entry – all logged transactions within a blockchain are time-stamped for security and authenticity. This improves the validity and makes it easier to track changes and developments.
- Individual encryption – data encryption provides outstanding security, with all records protected from end to end.
- Programmable – for a blockchain to work in conjunction with cryptocurrencies, it must be programmable. This allows for direct manipulation of records within a chain from individual users, which is an essential part of buying, selling and trading digital currencies.
There is much debate around the safety, security, and viability of blockchain as it relates to digital currencies. And while many remain skeptical about the technology, there’s no denying its strength and robustness in protecting crypto investors from data theft and cybercrime.
As touched on above, blockchain’s key strength lies in decentralization. With data distributed across innumerable global devices, a blockchain is almost impervious to direct, location-specific cyberattacks, as well as external influences like power loss or natural disaster.
What’s more, the nature of the technology also lends itself to maintaining tight security for investors and stakeholders. With new blocks of data always added to the chain in a chronological, linear fashion, users can easily spot inaccuracies and anomalies, while hacking such a system would require an extraordinary amount of time and money.
Of course, as with any alternative currency, you need to think carefully before investing in blockchain-supported crypto. There are risks involved with all cryptocurrencies, including mainstream variants like Bitcoin, so be sure to carry out the appropriate due diligence before parting with your cash.
At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
To learn more, visit our homepage or give us a call at +44(0)203 915 8111.
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