Thousands of cryptocurrencies use blockchain technology, and developers are working on integrating the technology into businesses, including medicine, art and finance. Blockchain might be one of the most-hyped innovations of the 21st century.
The reason for blockchain’s growing popularity can be boiled down to three key factors: how it works, its value, and what sets it apart from other internet technologies.
Blockchain technology provides a secure way for individuals to transact with each other without the need for an intermediary, such as a government, bank or other third party. Blockchain is a digital ledger of transactions that is maintained by a network of computers, making it difficult to hack oralter.
Blocks of records are linked together using cryptography and each transaction is verified by peer-to-peer computer networks. The data gets time-stamped and added to a growing chain. Once it is recorded, the data cannot be altered.
With the rise in cryptocurrencies, blockchain has become a household name. However, this technology offers much more than that and has the potential to revolutionize various industries such as real estate, medical records, and law.
Let’s use the Bitcoin system as an example to understand how blockchain, also known as distributed ledger technology, works:
To buy or sell Bitcoin, the purchase is documented and transmitted to a powerful computer network known as nodes.
This network of thousands of nodes around the world uses computer algorithms to confirm transactions. This is known as Bitcoin mining. The miner who first successfully completes a new block is rewarded with Bitcoin for their work. These rewards are paid with a combination of newly minted Bitcoin and network fees, which are passed on to the buyer and seller. The fees can rise or fall depending on the volume of transactions.
After a customer’s purchase is confirmed through cryptography, the sale is then recorded on a ledger that is spread across many computers. The majority of the network must confirm the sale in order for it to be finalized.
The block is securely chained to all prior blocks of Bitcoin transactions, using a cryptographic fingerprint known as a hash. The sale is then processed.
1982 was the first time that academic papers mentioned blockchain technology in a dissertation discussing “the design of a distributed computer system.” However, it wasn’t until 2008 when Satoshi Nakamoto’s paper “Bitcoin: A Peer-to-Peer Electronic Cash System” came along and brought this theory into actuality.
Blockchain pros and cons
Below are some of the advantages and disadvantages to consider when you investigate how blockchain technology affects cryptocurrencies:
No central government or authority regulates Bitcoin and other cryptocurrencies. This also blockchain’s lack of a third-party intermediary reduces costs, as fees associated with these type of transactions are eliminated. Furthermore, blockchain technology is time efficient — the blockchain works 24/7 all year long , which banks and other intermediaries cannot compare to.
Transparency plus anonymity
The Bitcoin blockchain records all transactions onto computers that are part of its network. Transactions have full transparency because the address and transaction history for cryptocurrency wallets, which store digital currency, are publicly visible. However, the owners of each wallet linked to those public addresses remain anonymous since their information is not recorded.
Accuracy and security
Since there is less human interaction in this type of transaction, the chances for error are lower. Every transaction must be verified and recorded by most of the network nodes before it can go through– making it nearly impossible to change or manipulate the information. This also stops people from trying to spend their Bitcoins more than once.
Public and private blockchain applications
Blockchain technology isn’t just for digital currencies- it has the potential to revolutionize many other industries as well. Developers have used blockchain to create complex decentralized finance (DeFi) products, games and digital collectibles known as NFTs.
Bitcoin and other popular cryptocurrencies (or altcoins) are all built on public blockchain networks, which anyone can join. However, many businesses choose to create private blockchain networks instead, where only certain people or organizations are allowed access. This allows them greater control over who can see or use their data.
Blockchain supplychain systems are beginning to pop up in different areas, particularly with IBM’s private networking solution. By using blockchain technology, companies can more easily track their product supply chains and avoid issues such as recalls. In addition, this system would allow for transparency between buyer and seller about the specific origins of a product.
According to Deloitte Consulting, a nationwide blockchain network for electronic medical records may improve patient care and health outcomes.
Smart contracts: Aenco’s blockchain technology can automatically change or update contract terms based on predetermined conditions.
Some developers are working on blockchain technology to be applied to digital elections.
Blockchain technology can be used for much more than just cryptocurrency. Its proponents say it can also streamline property transactions, whether they’re sales of real estate, investment portfolios or automobiles.
Opportunities for the underbanked
In regions where financial institutions are not well-developed or trustworthy, cryptocurrencies that use blockchain protocol enable cash to be transferred and stored without going through third parties who might take advantage.
Criminals like crypto
Unfortunately, like many new technologies, some of the first users were criminals. They use cryptocurrencies such as Bitcoin for payment and to scam holders of Bitcoin because of the privacy it provides. For example, Silk Road was an online black market that used Bitcoin to buy illegal drugs and other illicit services before it was shut down by the FBI in 2013. In the recent ransomware attack on Colonial Pipeline, the company had to pay $4.4 million in cryptocurrency to unlock its computer systems.
Bitcoin’s historic rise has resulted in a corresponding increase in investment scams. The Federal Trade Commission reported that, from October 2020 through March 2021, nearly 7,000 people lost $80 million in schemes promising quick returns. This is a year-on-year increase of nearly 1,000%.
Blockchain cryptocurrencies are highly volatile
Many people ask if blockchain is a wise investment. The answer to that question depends on what your goals are and how much risk you’re willing to take. In 2021, the popularity of cryptocurrency surged, with Bitcoin hitting an all-time high price of nearly $65,000. However, by fall 2022, the value of Bitcoin and many other cryptocurrencies had plummeted by more than half. Some crypto projects known as stablecoins have tried to address this problem by creating mechanisms that peg digital assets to the value of fiat currencies like the dollar or commodities like gold.
Crypto use is still niche
An ever-increasing number of exchanges, brokerages and payment apps sell Bitcoin now, and many companies accept it for payment including PayPal and Microsoft. Even so, using blockchain currencies like Bitcoin to make purchases remains uncommon rather than the norm. Also, when selling Bitcoin on cash apps such as PayPal in order to buy something else, users have to pay capital gains taxes on the sale in addition local state taxes owed on the product or service itself.
Bitcoin mining takes energy
High-speed computers are used in the mining process of Bitcoin and a lot of energy is consumed. If we were to compare Bitcoin’s proof-of-work system to a country, it would be the 34th biggest consumer of electricity – just behind Pakistan but ahead of Kazakhstan, according to the University of Cambridge Electricity Consumption Index. In May 2021, Tesla CEO Elon Musk announced that the carmaker would no longer accept Bitcoin until the cryptocurrency can find ways to reduce its carbon footprint. Developers of other blockchains have come up with less energy-intensive options, including a protocol known as “proof of stake,” which replaces mining with crypto staking.
Bitcoin blockchain is slow
The Bitcoin blockchain can process about seven new transactions a second; however, credit card company Visa says it can processed 24,000 transactions per second. This presents Bitcoin with a scalability problem that other forms of cryptocurrency are also trying to solve, including Ethereum.
The future of blockchain technology
Although Bitcoin is the most popular application of blockchain technology, there are thousands of other cryptocurrencies that use this same technology. It’s difficult to say whether or not Bitcoin will completely replace traditional payment methods, but blockchain applications are growing quickly. Some people believe that this technology will cause major changes across many different industries.
- Blockchain technology is a digital ledger of transactions maintained by a network of computers that makes it difficult to hack or alter.
- The concept first appeared in academic papers from 1982, but it was not until 2008 that it was brought into real-world use with the development of Bitcoin.
- Blockchain creates efficiencies that potentially extend far beyond digital currencies and have been applied to supply chain management, health care records, smart contracts, digital elections, and property transactions.
- Some pros of blockchain include decentralization, transparency plus anonymity, accuracy and security. However criminals like crypto because it provides privacy for their illegal activities. Additionally blockchain cryptocurrencies are highly volatile which can present a risk for investors.
- Despite these risks many companies such as IBM Blockchain and Deloitte Consulting are already using or developing private network solutions using blockchain technology because of its potential applications across industries