With close to 3,000 different cryptocurrencies in the market right now, it’s clear that despite their volatile nature, they are here to stay. But did you know almost all cryptocurrencies were born from the same concept? Nearly all cryptocurrencies are based on blockchain technology. Also referred to as the shared ledger, given its distributed nature, blockchain is considered one of the most secure digital technologies. In this article, we’re going to look at blockchain technology and how it is used to enable cryptocurrencies, including topics such as:
Why do transactions fail?
What is a cryptocurrency?
What are the types of cryptocurrencies?
What is blockchain?
How does a Bitcoin transaction work?
Features of blockchain
The Walmart problem
What is Blockchain?
Blockchain is a list of records called blocks that store data publicly and in chronological order. The information is encrypted using cryptography to ensure that the privacy of the user is not compromised and data cannot be altered.
Information on a Blockchain network is not controlled by a centralized authority, unlike modern financial institutions. The participants of the network maintain the data, and they hold the democratic authority to approve any transaction which can happen on a Blockchain network. Therefore, a typical Blockchain network is a public Blockchain.
As long as you have access to the network, you have access to the data within the Blockchain. If you are a participant in the Blockchain network, you will have the same copy of the ledger, which all other participants have. Even if one node or data on one particular participant computer gets corrupted, the other participants will be alerted immediately, and they can rectify it as soon as possible.
To understand the promise of blockchain-enabled cryptocurrencies and their advantages over traditional (fiat) currencies, let’s look at the issues inherent in fiat currency first.
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Why Do Transactions Fail?
Imagine two people are making a money transaction. Now, assuming the sender has properly sent the money from his bank, there’s no chance the transaction will fail, right?
Actually, there are several things that can go wrong, including:
Something could have gone wrong at the bank (such as a technical issue)
The sender’s account could have been hacked
The transfer limits of the day could have been exceeded
Debited from one account, never credited on the other side
Issues with data
However, none of these problems are applicable to cryptocurrencies. First, let’s have a look at what cryptocurrencies are.
What is a cryptocurrency?
A cryptocurrency is a form of digital currency that can be used to verify the transfer of assets, control the addition of new units, and secure financial transactions using cryptography.
One of the cryptocurrencies’ most important advantages over normal (fiat) currencies is that they are not controlled by any central authority. Without a central point of failure or a “vault,” the funds cannot be hacked or stolen.
As an analogy, think of the popular Microsoft Excel spreadsheet program. You can make changes to the data on your own that may differ from earlier versions of the spreadsheet that are shared with others. But if you make changes to a Google Sheets document, on the other hand, those changes also show up in every other shared copy. Similarly, the shared and distributed nature of cryptocurrencies keeps everyone on the same page.
Therefore, the transparency and distributed nature of blockchain technology are what make cryptocurrencies (at least those that use the blockchain) secure.
What Are the Types of Cryptocurrencies?
There are several cryptocurrencies available in the market right now. Some of the more popular ones are:
Bitcoin
Litecoin
Ethereum
Z Cash
Dash
Ripple
Monero
NEM
Stellar
As mentioned earlier, there are close to 3,000 cryptocurrencies in the market—a market that has become nearly saturated with options. Most experts say the vast majority of these options will eventually fail as users begin to coalesce around just a few.