Find out how blockchain technology works, what makes cryptocurrencies so popular, and why Bitcoin is so volatile.
Every few months for the past few years, stories about cryptocurrencies like Bitcoin make the news. Whether in a positive or negative sense, this new technology is a fascinating and rapidly developing prospect. But how exactly does it work? And what is blockchain? We take a closer look.
We’ll start by focusing on understanding blockchain, the technology that’s behind cryptocurrencies such as Bitcoin. Next, we’ll look at how cryptocurrencies work and why they’re so popular. Finally, we’ll explore the phenomenon that is Bitcoin.
What is blockchain?
Let’s start with the basics; what is blockchain? We’re starting here because this technology is at the heart of many cryptocurrencies, including Bitcoin. What’s more, the uses of blockchain technology go far beyond just digital currencies.
In the simplest terms, a blockchain is a type of database – a collection of electronically stored information or data. Yet a blockchain has many unique features that make it different from a traditional database. As the name suggests, a blockchain is a series of data ‘blocks’ that are linked together. This chain of blocks creates a shared digital ledger (collection of data) that records the activity and information within the chain.
Each blockchain ledger is stored globally across thousands of different servers. This means that anyone on the network can see (and verify) everyone else’s entries. This peer-to-peer and distributed ledger technology, as it’s known, means that it’s nearly impossible to falsify or tamper with data within a block.
So, to use IBM’s definition, blockchain is a shared, immutable (permanent and unalterable) ledger that facilitates the process of recording transactions and tracking assets.
How does blockchain work?
We now know what a blockchain is, but how does the technology work? We’ll keep things at a basic level here, but if you want to know more, you can check out our Cryptocurrency and Blockchain Technology Explained course.
Each block in the chain contains a few set elements – a certain amount of data, a cryptographic hash, and the hash of the block before it. The hash is essentially the fingerprint for that block – a unique identifier that relates to the block and its contents.
So, if the data within a block changes, so too does the cryptographic hash. Of course, we know that each block also contains the hash of the block before it. This means that if someone were to tamper with one block, each subsequent one would be invalid, adding a level of permanence and security.
This use of unique identifiers helps to make blockchains safe and trustworthy, but there are other elements that add extra layers of security. One such layer is called ‘proof-of-work’. This mechanism means that creating new blocks in the chain takes a set amount of time. As such, if someone were to tamper with one block, they’d have to recalculate the proof-of-work for all subsequent ones, which would take a lot of time and processing power.
The final layer in our blockchain explanation is the peer-to-peer (P2P) network. This aspect of it means that rather than one entity owning and supervising the blockchain ledger, it is instead distributed among a network of users.
When someone joins the network, they get a full copy of the blockchain. When more data (a new block) is added to the chain, it is sent to each user (node) on the network. This P2P network creates a consensus, as each node has to verify and validate the data.
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What is blockchain technology used for?
We know that blockchains can be used to create cryptocurrencies like Bitcoin (more on both of those later), but what else can this innovative tech be used for? Well, there are already plenty of real-world examples of how things like blockchain encryption are being utilised. Here are some examples:
- Transferring money and processing payments. Banks and fintech startups are realising the power of blockchain technology to settle payments and money transfers in a quick, secure, and efficient way. Organisations such as JPMorgan and Wells Fargo have incorporated blockchain into their businesses.
- Keeping records safe and confidential. Because the technology gives a tamper-proof way of sharing information, some organisations are utilising blockchain in healthcare for things such as storing confidential medical records.
- Creating smart contracts. One of the widely adopted uses for blockchain is that of smart contacts. These are self-executing contracts written as lines of code on a blockchain. Once both buyer and seller meet the terms of agreement, the contract auto-completes. This grants both parties a degree of certainty without the need for an intermediary or overseer.
- Streamlining supply chains. When it comes to blockchain and logistics, the technology can be used to easily and instantly record and recall data from within a supply chain. This helps companies track things like prices, dates, and locations with greater ease.
Why are blockchain skills so popular?
One of the interesting trends of recent years is the move of blockchain technology from a mysterious (and slightly suspicious) concept to the darling of modern business thinking. As we’ve seen already, industries such as logistics, healthcare, and fintech are all making use of systems built on blockchains. As a result, those with skills in blockchain usage are in high demand.
A 2020 report from LinkedIn named blockchain as the most in-demand skill in the US, UK, France, Germany, and Australia. What’s more, data from 2021 shows that demand for the role of Blockchain Developer grew by 488% from December 2020 to January 2021, making it the second-most sought-after job during that time.
The skills blockchain developers need
With companies across many industries hoping to implement blockchain technology, there is a clear need for those with the right set of skills. The role of a blockchain developer is to oversee the research, planning, and execution of developing a blockchain solution.
There are generally two types of roles in blockchain development – those focused on developing software and those developing core architecture. If you want to know how to become a blockchain developer, there are several areas you need to have expertise in:
- Cryptography. One of the keystones of blockchain technology is cryptography, the science of keeping information secure. As we saw earlier, hash cryptography is fundamental to blockchain.
- Blockchain architecture. Blockchain developers must have an excellent knowledge of how the technology works on a fundamental level.
- Data structures. There is a lot of data at the heart of how blockchains work. Those looking to work in this field will need to know how to create and use data structures.
- Smart contracts. This aspect of blockchain is becoming pretty essential for new projects. Often, developers will need to know network-specific programming languages such as Viper and Solidity.
- Web development. Because of the decentralised and distributed nature of blockchains, web development is an essential skill for developers. Both front-end and back-end development are useful.
What is cryptocurrency?
So far, we’ve looked at some of the applications of blockchain technology across various industries. One area we haven’t yet explored is that of cryptocurrency, as it’s worth a closer look on its own. You’ve no doubt seen news stories about various cryptocurrencies, but what are they? And how do they tie into blockchain?
Cryptocurrency is essentially digital money. However, unlike regular fiat currency (such as Dollars, Pounds, Yen, etc.), it decentralised, meaning it isn’t backed or regulated by a central authority, such as a bank, government, or country.
There are other differences between crypto assets and other kinds of money. For a start, cryptocurrencies don’t exist in a physical format – there are no coins or bills that you can use; they are all digital. Similarly, they’re not based on another asset such as gold, and it’s not stored in a bank or financial institution.
So, cryptocurrencies are digital, decentralised currencies that are based on blockchain technology. Although cryptocurrencies such as Bitcoin and Ethereum are some of the most well-known, there are actually more than 4,000 in existence.
How do cryptocurrencies work?
We already know how blockchain technology works. Blocks of data in the chain are created with unique identifiers, referencing the block before them. These blocks of data are shared and verified across a distributed network of users. Cryptocurrencies use this principle, using and recording transactional data in the blocks.
Let’s look at a simplified example of how a cryptocurrency transaction might take place:
- A user has 100 coins in a particular cryptocurrency. These funds are stored in a digital wallet which has a public and private key. Only they know the private key, and this ties their cryptocurrency to that particular key. The public key is linked to the private one, allowing them to send and receive funds.
- The user wants to purchase a product from a vendor for 10 coins of the cryptocurrency. The user agrees to transfer this amount from their wallet to the vendor’s wallet using the public key to identify them.
- The transaction is digitally signed using the user’s private key. This transaction is then recorded and sent to the wider cryptocurrency network. Here, it is verified, ensuring that it is legitimate and that the user has enough funds to make the transaction.
- This transaction, along with many others, is added to the next block of the blockchain, confirming the transaction.
What is cryptocurrency mining?
There is another piece of the blockchain and cryptocurrency puzzle that we’ve not covered yet, and that relates to cryptocurrency mining. To add a new block to the blockchain (and by doing so, verify the transactions within that block), a small percentage of users in the network race to solve a very complex maths puzzle.
The solving of this problem takes a lot of computing power (and electricity), but the winner gets the right to add the new block to the blockchain. This then becomes the official record on the public ledger and the person who solved it is rewarded with an amount of cryptocurrency.
Although this seems like a surefire way of making some money, there are a few issues. Crypto mining often requires specialised (and expensive) computing hardware. What’s more, the more people mining, the harder it is to solve the puzzles, often making it impossible for casual users to mine even one block.
That being said, there are opportunities for users to pool their computing resources with other miners, which can mean they get a small share of the profits. However, the electricity-intensive process can mean that the cost of mining isn’t worth the rewards.
The pros and cons of cryptocurrency
If you’ve followed cryptocurrencies in the media, you’ll have no doubt noticed both good and bad stories about them. From record-breaking all-time highs to stories of lost fortunes, this new technology is clearly fascinating. But what are the actual positives and negatives of cryptocurrency? We’ve outlined some of the pros and cons below:
Emerging technologies often bring a host of new opportunities and uses. Here are just some of the positives of cryptocurrency:
- They’re self-managed. Cryptocurrencies are decentralised, meaning no one authority can influence the price. Instead, members of a peer-to-peer network are responsible for the integrity of the currency.
- They’re secure and private. The decentralised blockchain ledger is a secure basis for the currency. What’s more, it offers a large degree of anonymity for transactions.
- They’re fast and cost-effective. For those looking to transfer and move funds, cryptocurrencies are near-instant. Without the need for a third-party financial institution to handle transactions, it’s possible to transfer funds without having to pay excessive fees.
Of course, there are also plenty of downsides that come with cryptocurrencies in their current format. Here are just a few:
- They’re volatile. Although no one central authority can alter the price of cryptocurrencies, it’s possible for small groups of users to influence the unregulated market. This means that prices can rapidly rise and fall, making them an unsecure investment.
- They’re susceptible to hacks. If you lose your cryptocurrency wallet private key, you lose access to all the funds that are in there. What’s more, the exchanges that often store this wallet data aren’t always that secure. Millions of dollars in cryptocurrencies have been lost through hacking.
- They use a lot of energy. The process of mining for cryptocurrency is incredibly energy-intensive. As such, it can have negative impacts on the environment.
What is Bitcoin?
We’ve come this far without really mentioning the biggest name in the cryptocurrency market – Bitcoin. So what is Bitcoin? And why is it so popular? Bitcoin is a cryptocurrency based on blockchain technology. It works in the same way that we’ve mentioned above, with all of the positives and negatives that come with it.
The digital currency emerged in 2008 after the financial crisis. Essentially, it was a way for people to make purchases and trade funds without having to go through banks and financial institutions. However, many elements of linking digital money to cryptography had been around since the 1990s.
Despite being worth less than $0.01 in May 2010, it was then that the first transaction in Bitcoin was made. Two pizzas were purchased for 10,000 BTC. At the time of writing, that amount of BTC is worth over £350 million.
In the years since, the price of Bitcoin has fluctuated wildly. At the start of 2017, each Bitcoin was worth around \$1,000. By December of that year, it had peaked at \$20,089. However, after that point, prices gradually declined, before another peak towards the end of 2020.
So, that concludes our look at the basics of blockchain, cryptocurrency, and Bitcoin. Clearly, blockchain technology is an exciting and versatile technology that has many uses, including for powering cryptocurrencies such as Bitcoin.
Although this technology is in its infancy, many businesses and industries are exploring the applications of blockchain. As such, the demand for those with skills and knowledge in this area is high. If you’re looking to develop your skills in blockchain, now is the ideal time. Why not get started with one of our online courses today?