Some people refer to Bitcoin or Cryptocurrency when talking about blockchain technology. However, these terms are not really interchangeable: blockchain, cryptocurrency and bitcoin are separate but interconnected conceptions. In this article, Twendee will introduce the basics of blockchain technology, cryptocurrency and Bitcoin.
Blockchain: Conception | Blockchain, Cryptocurrency and Bitcoin
Blockchain gets its name because of the way records are organized: a chain of linked blocks.
More specifically, a blockchain is a linear chain of multiple blocks connected and secured by cryptographic proofs. Blockchain technology can also be administered in other fields except financial activities. In the context of cryptocurrencies, blockchain has the role of keeping a permanent record of all confirmed transactions.
‘Distributed’ and ‘decentralized’ refer to the way the blockchain is organized and maintained.
You can think of public records of home sales, bank ATM withdrawal records, or eBay listings of sold items. In each of the examples given, only one entity controls: a government agency, a bank, or eBay.
Another common factor is that there is an exclusive master and anything else is simply a backup, not the official one. These objects are centralized because they are maintained by an organization and often rely on a single database.
In contrast, a blockchain is typically built as a distributed system that functions as a decentralized ledger. This means that there are many copies (distributed) and no single organization holds control (decentralized). Each user participating in the blockchain network keeps a digital copy of the data. The blockchain data is regularly updated with all the latest transactions and in sync with the user’s copy.
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We can understand that a distributed system maintained by the collective work of many users around the world. These users are also known as network nodes, and all these nodes participate in the verification and validation of transactions according to the rules of the system. Thus, power is decentralized (no central authority).
Blockchain: Practicality | Blockchain, Cryptocurrency and Bitcoin
Essentially, a block is a data type that, among other things, contains a list of recent transactions (much like a printed page of entries). Blocks, like transactions, are public and visible, but they cannot be changed (like storing each printed page in a sealed glass case).
As new blocks are added to the blockchain, a persistent record of linked blocks is formed (like a physical ledger with many pages). This is a simple example to make it easy to imagine, but in reality the process is much more complicated.
One of the main reasons why blockchains are resistant to modification is that blocks are linked and secured by cryptographic proofs. To generate new blocks, people in the network need to engage in an expensive and computationally intensive operation called mining.
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Basically, miners are responsible for verifying transactions and grouping them into newly created blocks which are then added to the blockchain (if certain conditions are met). They are also responsible for bringing new coins into the system, which are released as a reward for their work.
Each newly confirmed block is associated with the block immediately preceding it. The good thing is that the data in a block cannot be changed once it is added because of cryptographic proof. The process of creating a new block is expensive, and undoing is extremely difficult.
Cryptocurrency | Blockchain, Cryptocurrency and Bitcoin
A cryptocurrency is a form of digital money used as a medium of exchange within a distributed network of users, they can be traded with other users or bought and sold on exchanges. In addition, each virtual currency can be maintained or kept in a personal, digital wallet. Unlike traditional banking systems, these transactions are tracked through a public digital ledger (blockchain) and can be performed directly between participants (peer-to-peer) without needing an intermediary.
‘Crypto’ refers to cryptographic techniques used to secure the economic system and to ensure that the creation of new cryptocurrencies and transaction validation goes smoothly.
Cryptocurrencies are divided into three categories below:
- Virtual currency is electronic money that is issued and controlled by organizations and businesses. However, virtual currency is not recognized by the government. They only operate in a virtual environment to serve certain purposes.
For example: coins in the game; coins or tokens used to buy products or services on websites; e-commerce sites. - A fiat currency is a government-recognized electronic currency. They are stored in ATM cards, bank accounts, e-wallets, etc. Fiat money has the same value as cash.
- Cryptocurrency is a subset of virtual currencies. Cryptocurrency is based on digital platforms and are not regulated by the government. The advantage of this cash flow is high security; there are no intermediaries, so it is safe.
Not all cryptocurrencies are mineable like Bitcoin, but many of them depend on mining and have a slow and controlled growth. Many alternative virtual currencies are based on blockchain technology and are designed to ameliorate the perceived vulnerabilities of bitcoin, and every virtual currency seeks to be a digital medium of transaction of some kind. Therefore, mining is the only way to create new units of coins and helps avoid the inflationary risk that is a threat to traditional fiat currencies, where the government can control the source of money supply.
Bitcoin
Bitcoin is a form of Cryptocurrency, created and held in digital form. Unlike traditional physical currencies, like dollars or euros, Bitcoin is not printed. Instead, Bitcoins are produced by computer users around the world, using software to solve mathematical problems.
Another significant difference between cryptocurrencies and physical money is banking: Bitcoin banks do not exist. The reason for this is that Bitcoin itself is a bank. There is an independent ledger that provides information on the ownership status of all users and the transaction history between them. Moreover, the number of Bitcoins is limited. This also limits the role of the supervisory organization.
While Central Banks can print as much money if they want, Bitcoins are finite: by 2140 there will be 21,000,000 bitcoins in circulation. Furthermore, the amount of Bitcoin in circulation as a reward for “Bitcoin miners” decreases according to a predetermined rule. Bitcoin mining pioneers can earn the most, with the lowest cost. There are currently around 16,500,000 Bitcoins in circulation. As a result, only 4,500,000 BTC can be mined and the supply in circulation will gradually decrease, which is an important deflationary factor for this cryptocurrency.
Despite being the most famous cryptocurrency, Bitcoin is not the only one. There are many other cryptocurrencies, each with its own features and mechanisms. Furthermore, not all cryptocurrencies have their own blockchain. Some were created on top of an existing blockchain, while others were created entirely from scratch.
What factors can affect the value of Bitcoin?
What happens when the source of Bitcoin runs out and there is nothing left? Why do miners spend their energy to keep mining? Currently, the reward for miners is the transaction cost, and in the future this will be the total profit of the miners. But will this fee be enough for miners to cover the cost of the tool and their main income?The first and also the most important factor – the cost of mining, depends on the following factors:
- Energy costs (electricity or renewable energy sources prices, etc.)
- Development of new computer technology (reducing current consumption).
- Growing demand for computing power
The increasing demand for computing power could also increase the value of Bitcoin. Remember, the number of Bitcoins is limited. And the increased demand could end up with a rise in the price of Bitcoin. There are also other factors worth considering. For example, if geopolitical tensions increase or traders lose confidence in traditional currencies, Bitcoin could appreciate. Cryptocurrency is a new and revolutionary product, so it is very likely that the factors affecting its value will change over time.
Other Cryptocurrencies
In addition, several other cryptocurrencies are becoming increasingly popular. The success of Bitcoin has led to the development of many other cryptocurrencies, commonly known as altcoins. Most of these altcoins are self-sufficient based on the Bitcoin protocol and are interesting in their own right. Most of these coins are still cheap and easier to buy or mine. The following are the most popular altcoins:
- Litecoin – like most altcoins, it is based on the Bitcoin protocol, but designed to ensure that mining is much cheaper and more democratic than BTC.
- Ethereum – also known as Bitcoin 2.0, is an alternative to Bitcoin. The price of Ethereum rose sharply when some problems with BTC occurred and when an update of its system was announced. The latter makes Ethereum payments easier and faster as well.
- Ripple – an open-source peer-to-peer (P2P) cryptocurrency that offers all the same features as Bitcoin but also other advanced capabilities, including instant transactions.
While Bitcoin is still the most popular cryptocurrency, Ethereum, Ripple, Litecoin and others are still growing. Cryptocurrency is a financial revolution with many features and changes coming.
In this article, Twendee has provided readers with an overview of Blockchain, virtual currency and Bitcoin. The question of the potential of digital currency will certainly still need a lot of time and debate to really find an answer!
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