Blockchain and cryptocurrencies - understand the environment, Part 1
"The first generation of the digital revolution has brought us Internet information. The second generation - driven by blockchain technology - brings us an Internet of values: a new platform for transforming the business world and the old order of human affairs for the better. " - Don Tapscott, co-founder of Blockchain Research Institute.
Before undertaking any investment activities, attention should be paid not only to the financial instrument itself, but also to the environment in which it was created. It is also important to fully understand what his work is based on. This will allow us to get to know and assess the market better and to predict the possibilities of its development with greater probability. Including the level of potential profits and losses that we can expect.
Before we were able to buy cryptocurrencies and trade on them, their environment was created, i.e. Blockchain - a block chain.
Blockchain technology was created to store and send transaction information concluded on the Internet. All transactions are sorted in the form of successive data blocks to which a specific number of transactions and a time stamp are assigned.
When a given block is filled with information (transaction data), another block is created, followed by the next and the next, and so on. In this way we form a chain of interrelated blocks in which data about various, unrelated transactions can be stored. For example, information on the change of the holder of a given cryptocurrency (it was the first of blockchain applications used in Bitcoin), company shares, ownership status or commercial and service transactions.
The method described is not an innovation in itself. This methodology is used when keeping accounting or accounting books. So where can you look for a breakthrough or something that can revolutionize current accounting systems?
Blockchain, as a data set, is secured by specialized cryptographic systems, which makes it virtually impossible to break with current technology. Traditional systems store data in one place using an available computing server. In the case of blockchain, information is scattered over multiple blocks and authenticated by every computer connected to the data chain network. Blockchain and cryptocurrencies are therefore decentralized.
In practice, it looks like that thanks to the already popular peer-to-peer system, every computer is able to participate in the transmission and authentication of transactions. Just download the full block chain, called the node or, from English - full node.
The main aspect that distinguishes blockchain from the standard database is no changes can be made to previously saved data. In the case of databases managing software using one server, we can easily erase or edit all entered data, e.g. transactions. Using blockchain is not possible. After confirming information, e.g. about a transaction, it is permanently assigned to a specific block and you cannot edit or delete it. Blockchain is therefore a great solution to problems where trust is, or rather the lack of it. If there must be a user group within the system that does not trust each other, blockchain protected by cryptography is their only option.
In the event of an attempted fraud, e.g. entering an unauthorized transaction or changing an existing one, blockchain nodes, in the verification process, will discover that one of the copies of the book contains a transaction that does not comply with the network records. In this case, they will refuse to include it in the block chain. The effect of the refusal is to reject the block containing the fake information, and thus - the change will not be included in the whole chain.
An important advantage of the whole system is anonymity. Transactions carried out by the user are recorded in the unrecoverable and encrypted transaction log. Paradoxically, blockchain usually has open and public access, but transaction logs are not assigned to specific persons, which causes difficulties in physical identification of the holder of a given wallet. Therefore, we say that Bitcoin - the first, oldest and most trusted cryptocurrency is pseudonymous. We know the addresses of bitcoin owners, but we cannot determine who they belong to in the real world.
Current technological solutions ** do not provide the ability to break block chain security** using the POW protocol (Proof of Work - securing a global cryptocurrency network with high computing power).
The only real threat is the so-called "51% attack". It consists in the fact that the attacker possesses over 50% of the computing power of the entire network. Then he can approve blocks, which will allow you to make changes to the blockchain or create a separate block chain within the network for the double spending of a given cryptocurrency.
This type of attack is possible on currencies with low computing power. In the case of Bitcoin (BTC) it would require huge hardware and energy resources, so it is highly unlikely due to its unimaginable financial costs.
It is speculated that with the introduction of quantum computers, significantly increasing the computational capabilities of computer systems, the cryptocurrency security system based on old blockchains will also have to be significantly modified to resist possible attacks. Currently, cryptography of the elliptic function on which Bitcoin is based is simply impossible to break and will remain so until the construction of the first powerful quantum computers.
That is why some cryptocurrencies already have appropriate encryption systems that protect them against this possibility. However, without knowing what the real quantum computers will be, it's difficult to know if they will also prove reliable. We can only speculate in this area.
Examples of how to use Blockchain:
1. Voting systems - undeniable and fully automated counting of voter votes with a full but anonymous voting history, 2. Peer-to-peer payments and money transfers - real-time cash exchange between users without intermediaries, 3. Gambling - players anonymity, winnings transfers, the possibility of introducing their own currency to games. 4. Government services - creation of personal files, property deeds. Introduction of a unified system of paying contributions and taxes, 5. Intelligent contracts - concluded and executed automatically without the control of external entities, but trusted in the blockchain network, 6. Transport - car rental, sharing journeys, bypassing intermediaries and state regulations, 7. Digital identity verification - scattered information about people, digital signatures,
Four basic principles on which blockchain systems are based:
These networks are:
1. Distributed - each machine connected to the network has a copy of blockchain, and the entire structure is decentralized. 2. Durable - due to its structure it is unchanging and insensitive to damage - it cannot be burned, flooded or accidentally deleted. 3. Public - people using the network are anonymous due to the difficulty of identification, but all their movements within the network are already available to every user. 4. Marked with date - all transactions carried out within the network have information on the date of conclusion.
The process of blockchain system operation is so extensive and complicated that it is worth here, after explaining the necessary basics, go to the topic that traders are most interested in - Cryptocurrency.
Let's imagine a situation when a friend calls us on Saturday evening and asks him to send PLN 100, because he ran out of fuel to get home. Of course - we log in to our bank, tap the amount, approve the transfer and are happy to see that the funds have been deducted from our bank account and will allow our friend to return home. But right away ... are you sure? Unfortunately, due to the fact that banks do not work on weekends, the transfer was sent outside of the binding booking hours. Our transfer will "hang" in the banking system, until on Monday morning it will be posted by the banking systems to reach our friend at the earliest on Monday afternoon. Why is this happening? This is due to the fact that we are addicted to intermediaries (banks) who control and limit the flow of our funds. What if we skipped the actions of third parties and persons and found the possibility of sending funds directly to the person we are interested in? Here cryptocurrencies come to the rescue ...
Cryptocurrencies are the first means of payment that were created without cooperation with any existing financial institution. Trading in cryptocurrencies takes place electronically, without the participation of any banking system, directly between users of cryptographic currency, i.e. in peer-to-peer technology.
This means that transactions are not supervised in any way without government bodies or banks. So there is no entity that will inform the tax authorities if we want to sell a large number of cryptocurrency units, as is the case with banking transactions for an amount exceeding the equivalent of 15000 EURO.
All funds kept by us in cryptocurrencies are stored on a private, secured hardware, dedicated or electronic wallet, to which only its owner can access. Thanks to this, we can be sure that any creditors will not block our accounts through any of the financial institutions, and we also protect funds against any bailiff interference.
It is worth mentioning that the first digital currency introduced into circulation was Bitcoin (BTC). It is currently the currency with the largest capitalization of all available cryptocurrencies. The number of coins that will be put into circulation is strictly limited (21 million pieces), and each of them is unique in its own way.
None of them, thanks to block writing, ** can not be issued twice** or duplicated. It is also not possible to enter bitcoins of unknown origin into the system.
Among the most interesting events in the history of Bitcoin we can mention:
- 2008 - birth of the first internet currency - Bitcoin,
- 22.05.2010 - pizza purchase - 10,000 bitcoins paid,
- 09.02.2011 - Bitcoin was priced on a par with the US dollar $,
- 02.06.2011 - Bitcoin reaches the price of 10 $,
- 10.04.2013 - Bitcoin reaches the price of 266 $,
- 20.02.2017 - Bitcoin was valued at 1055 $,
- 17.12.2017 - Bitcoin reaches the peak of its previous valuation, breaking through 19500 $,
Bitcoin, as well as other digital currencies, experienced great highs and painful falls during its existence. People who in the early stages decided to invest in ** BTC** or dealt with its mining (mining) had a great chance to make a fortune. Certainly, there is also a large group of people who lost money as a result of investing in cryptocurrencies due to their considerable volatility.
Above, I allowed myself to use the phrase "Bitcoin mining". Often it is also called cryptocurrency mining. What really is this digging?
The term cryptocurrency mining comes from the translation of the English word "mining" used in the context of mining digital currencies. Most cryptocurrencies can be "kicked", i.e. rewarded as a coin or part of it for solving complex cryptographic puzzles.
These calculations are related to the approval and encryption of data blocks according to specialized hashing algorithms. The computer that will be the first to solve the task correctly - extract the block, will receive a certain number of cryptocurrencies as a reward.
Unfortunately, the times when a home laptop or the best-equipped desktop computer gave colossal results have gone forever. Currently, specially built "excavators" with increased computing capabilities are used for this purpose. In the case of Bitcoin, as well as many other cryptocurrencies, miners come across a self-regulating level of mining difficulty. This means that the network itself increases "the difficulty of solving cryptographic puzzles" to keep the extraction time of individual blocks constant. For BTC, blocks are mined every 10 minutes.
Cryptocurrencies can be divided into two types - coins and tokens.
The first of them (coins) are cryptocurrencies operating on their own blockchain network, acting as digital money. Currently the largest projects include coins such as Bitcoin, Monero and Litecoin.
In the case of cryptocurrencies, there may be so-called division of the main chain called "fork". The largest and perhaps the most famous division of the block chain, which resulted in the creation of another coin, was division of the chain of Bitcoin itself. The forks can happen when sufficiently large groups of "miners" disagree as to the further functioning or development of the blockchain network.
Then, for every BTC holder, an appropriate amount of Bitcoin Cash - a newly created coin was allocated. The division of such a chain together with the distribution of coins is called Hard Fork. In most cases, we speak of a coin when it has its own environment, but it is also mined by "miners" - owners of excavators, who maintain the entire network environment by solving complex cryptographic issues.
Also here we can find projects that are exceptions to the rule - an example is Ripple (XRP), which is a coin, but it is not mined - in this case the network does not operate on the principle of extracting coins from blocks, but on the principle of synchronization and comparing data from each information node. This is a slightly different technical solution and for this reason we will not spend more time on this basic training.
The second type of cryptocurrencies are Tokens - they use the already created blockchain system and "work" in the environment of another cryptocurrency having its own system, giving the ability to create and share other projects.
To this end, platforms such as Ethereum, NEO or Qtum have been created.
Tokens are usually used as a means of payment in a specially designed application for them. For example, we can recall projects such as DENT - serving and allowing for making payments for telecommunications services or MedicalChain, thanks to which the patient has constant access and the ability to control their own medical documentation.
Tokens are usually distributed in the form of pre-sale - ICO or Initial Coin Offering. It is a form of project financing where potential investors have the opportunity to invest in the project and receive tokens much faster than the clients of the exchanges. This is done using a price previously set by the creators.
However, no one guarantees that the token will keep the presale price or increase at the time of its listing. Therefore, it is important to be aware that investments in ICOs are extremely risky. Therefore, it is worth analyzing every project in which we intend to invest with great caution. To do this you must, among others check what function it has to perform after entering the system and whether it is actually a solution that has a chance to be permanently implemented.
As you can see, cryptocurrencies are not only Bitcoin (although it is the most popular and the most secure). Due to the lack of regulation or supervision of any financial and state institution, smaller projects - called altcoins - depend only on their creator, who, when creating the system, determines the number of coins issued, the purpose, and the applicable price in pre-sale or product availability on the selected markets.
The price of each cryptocurrency depends only on the free market, hence we often encounter sudden increases of several hundred percent and equally fast falls. You can experience this especially when the market for a given cryptocurrency pair is shallow - there are not many buy and sell orders on it.
The main features of electronic currencies are the security features we have listed above:
__ Hashing __ - which verifies data consistency. It maintains the entire system structure and codes addresses and transactions performed by them. Hashing is also responsible for generating cryptographic problems (puzzles), after which (miners) receive remuneration (coins).
__ Digital signatures __ - are used for signing monetary transactions (owner's consent to perform the given transaction). Thanks to signatures, users can verify their own identity as the owner of a given item (information) without disclosing it to third parties.
Moving on to the article summary, we've collected the pros and cons of cryptocurrencies.
- ease of use,
- having a defense mechanism against the effects of inflation - a limited number of coins released into circulation without the possibility of creating new ones,
- anonymity of transactions,
- transfers made in real time, funds are transferred to the recipient's account immediately after ordering the transaction, regardless of where the given person or business entity is,
- unlimited use - the ability to program and edit source codes to adapt the currency to its function.
- exposure of currencies and the entire market to criminal activity - although it must be admitted that blockchain, as it is a completely public network and all transactions are permanently recorded in it, is rather a poor tool for criminals,
- the theory of a speculative soap bubble,
- no possibility to recover funds in the event of lost private keys to encrypted wallets - but it teaches us responsibility for your actions!
So, do cryptocurrencies have a chance to revolutionize payments in the world and displace cash or payment cards? Currently, this seems unlikely, but looking from the perspective of human development - it is absolutely impossible.
Before we began payment with plastic cards, we paid in cash and a larger purchase was always burdened with the risk of carrying more money in the wallet. Before cash appeared, our ancestors wore leather bellows with gold, and even earlier they were paid with kauri shells. Certainly, with every change of the said payment system, one could have doubts about its adoption.
Maybe the next payment method will be an unattended cryptographic system? One can find many voices that say that people associated with the current payment system will not give "power" over monetary policy to people. At the moment we can only think about it, but the future is knocking harder on our door, and the created cryptocurrency projects are more and more often and more ambitious in solving more current problems related to both the speed of transactions and maintaining privacy unit. In the end, time will verify who was right.