What is the blockchain.
With the emergence of cryptocurrencies over the past decade, the blockchain technology has become a necessary one. It is the foundation on which Satoshi Nakamoto, the purported creator of Bitcoin built it. Blockchains are a revolutionary technology for the future of finance due its security.
As the name suggests, a blockchain is made up of numerous parts called blocks (chain of blocks). Each block holds pertinent data like payment records and list of transactions made. Also, the details of the sender, receiver and amount are all situated on a block.
The blocks do get full, and when they do so, new blocks are created and added onto the network; thereby creating a chain of blocks. Although the figure is highly variable, it takes over 1500 transactions or more for a block to reach its limit.
When a block reaches its limit and is added to the network, the issue of mining comes in. Miners guess and solve the password of a block to be rewarded with some amount of the crypto.
The bitcoin blockchain is known as a ledger; in the accounting sense. The adoption of blockchain technology in finance is revolutionary because of how difficult it is to alter it. The data contained on each blockchain would be affected if someone successfully tampers with just a little part of it.
Blockchain technology’s main security option- HASHING
Cryptocurrency mining involves solving a hash. Hashing is the process of passing specific data through a computational formula to give out results. It is similar to solving a math puzzle. Hashes make it impossible to change the data on a block because they are only generated once.
A hash could be likened to a “password”. With reference to the blockchain technology, hashing could be likened to guessing the “password” to gain access to a system in a highly random manner by high end computers. The SHA-256 is the algorithm implemented in hashing on the blockchain.
In regular financial systems, it is seemingly easy to game the system by backdating information, processing payments twice as well as changing sender or receiver details. Hashing solves this; change a minute detail in a block and the hash will change to invalidate everything.
Blocks on the blockchain technology verify each other as well. This means if you tamper with a single piece of information, you would need to tamper with all the blocks on the sequence to make the information valid. It is very hard to gain that much control.
Three key elements provide this added security; each block contains transaction data, hash and hash of the previous block. The hash of the previous block makes it possible for the blocks to verify each other. The transaction data includes sender and receiver details as well as the amount of bitcoins involved.
Proof of work’s role in the blockchain technology.
Hashing works hand in hand with a process known as proof of work. This is because; hashes do not guarantee 100% security though they contribute a lot to it. Modern computer systems may have the capacity to make changes and recalculate all the hashes. This is where the proof of work comes in.
It is is the effort that goes into solving a hash and it is very crucial to bitcoin mining. As the term implies, proof of work shows that a miner actually put in the time and power to guess and solve the hash of a block.
It is used in the validation of transactions and the creation of new coins. Proof of work requires a huge amount of processing power for the network, as it slows down the creation of a new block.
It takes about ten minutes to calculate the proof of work for a new block to be added to the chain. This means that if you tamper with one block, you would have to recalculate the proof of work of all the other blocks involved as well. This would be time and energy consuming.
Decentralized finance system- A new era.
Aside the hashing algorithms and proof of work that makes the blockchain technology secure, there is also the topic of decentralization. The blockchain is decentralized unlike mainstream financial systems and this means no single individual has total control of it.
Decentralization means it’s a peer to peer network and everyone involved has access to it. The computers involved from different parts of the world that form the network are called nodes.
Whenever a new block is created, it is distributed to all the nodes for verification. If the verification proves that a block is invalid, the blockchain network rejects it. So in order to crack the blockchain and tamper with it, an attacker would also have to gain control of the vast part of the network.
The security of the blockchain with respect to the future of finance lies in hashing, proof of work and decentralization. These three are very hard hurdles to cross in order to tamper with the system.
Bitcoin or cryptocurrency mining is abstract!
Bitcoin and the several other cryptocurrencies that depend on the blockchain technology are mined. Mining in this sense is abstract but it can be compared to mining a precious metal like gold. It is used to generate new coins and verify transactions.
Rather than using heavy machinery to dig the earth and prospect for precious metals; bitcoin mining involves powerful computers that calculate and solve complex mathematical puzzles (hashing). It is heavily dependent on electrical power rather than other forms of energy like crude oil.
Miners get paid in bitcoins or the specific cryptocurrency in question and this serves as the motivation for them to keep mining. A decade ago, simple computers were able to join the network and mine to get paid but it is not so in this day.
The growth of the blockchain with the popularity of cryptocurrencies has made mining more difficult and power intensive. These days, bitcoins are mined on a large scale with super powerful computers run more or less like data centers.
As time goes on, bitcoin halving will create scarcity and make mining more power intensive, difficult and less rewarding. Since 2020, miners receive 6.25 btc of newly minted bitcoins and this reward will be halved in 2024 and it will go on for every four years until there is no bitcoin left to be mined.
The maximum amount of bitcoin that would ever be in supply is 21 million. Miners would no longer depend on newly minted bitcoins as reward when the last block is mined in about 100 years to come. Rather, they would be relying on transaction fees.
This is the beauty of the blockchain technology, a security focused and an open one.
Blockchain technology advantages over current centralized financial systems.
There are no set closing and opening hours as it is live 24/7, 365 days a year. The banking systems today are mostly open 24/5 and are closed on holidays.
Transaction time is faster as compared to the banking system. It many take anywhere between 24 hours to 72 hours of working days to process a transaction with a bank. Card payments may be the exception. On the blockchain network, it could take between 15 minutes to an hour or less if the network is not congested.
Anyone with a smartphone and an internet can have access to a cryptocurrency wallet; this makes banking the larger part of the population possible. On the contrary, banks require certain documents before opening accounts for people and these may not be readily available.
Blockchain technology downsides.
There has been the issue of how bitcoin mining is very intensive on electricity as well as the high cost involved. Also, privacy of wallets make it susceptible to the use of illegal activities; fraudulent payments and the likes. This is made possible because, you will hardly know which wallet belongs to who.
All in all, the benefits stand to outweigh the downsides in the long run.