Blockchain: Demystifying the Technology Behind Cryptocurrency

The current cryptocurrency bull run doesn’t seem to be running out of steam yet and continues to capture global attention like never before. In particular, thanks to a new sector of so-called “decentralized finance” products and services, the industry appears to be giving yields higher than any other asset class, with cutting-edge technology spawning a whole new set of financial and other services never thought possible.

Estimated to be valued at a whopping $69 Billion in the next six years, (mind you, this does not include the crypto market capitalization) the blockchain industry has become a force to reckon with. 

With increased media coverage, a lot of people have been asking me about the technology behind cryptocurrency and so I thought, why not remove the shroud behind this enigmatic technology in a manner that doesn’t require you to have a computer science degree to understand?

 

The Technology Behind Cryptocurrency in Simple Terms 

It’s Just a Ledger

The technology behind cryptocurrency actually revolves around a new type of ledger. At its core, the blockchain is simply a digital database that stores information; in the case of cryptocurrency, information about transactions. Modern data is all about storing numbers in a computerized form and there are different ways, with blockchain being touted as one of the most secure in several aspects; this recognition thanks to Satoshi Nakamoto’s (in)famous Bitcoin.

Blockchain simply stores data and is a complete information recording and retrieval system. You send crypto, it gets recorded. You receive some, it gets recorded. This debit and credit of numbers (coins, tokens, money etc.) essentially makes blockchain a digitized ledger.

 

A Chain of Blocks, Really

Now that you know blockchain is a file storage system, the next point (and my favorite) is: why such a mystic name for such a simple thing?

Have you ever looked at a set of encyclopedias? It’s typically made out of dozens of books and to make it easily searchable by readers, they arrange the content and information in alphabetical order, in separate volumes of roughly the same number of pages. Just like the physical volumes or books of an encyclopedia, data in a blockchain is stored in their digital counterparts called blocks. Like a book, each block can only hold a limited amount of data. Once the data is written into a block and “published”, it is then added to the previous blocks, before another new block is written and added. Every new block is connected sequentially to the last one – block 1, block 2, block 3 and the list just starts populating.

What you eventually get is a long chain of blocks… a block-chain, hence the name.

 

Decentralization is the Key Technology Behind Cryptocurrency 

While the process of adding blocks to this new system of data storage, it is blockchain’s sophistication that has garnered it so much hype. Blockchain differs from a traditional storage system by virtue of its two biggest characters: security (we will cover this in a dedicated blog) and decentralization.

Those who wish to actively participate in a blockchain network miner (these are called miners, nodes and/or validators, depending on their precise role) store a complete copy of the ledger. In effect, this means there are many copies of the ledger distributed across multiple computers. This is why the term “distributed ledger” is also frequently used to describe blockchain. Unlike traditional databases with only one copy (perhaps with backups that are usually not current), a distributed ledger has no single point of failure. This means that even if one or more computer fails, or is one copy of the data is corrupted, there are many others maintaining the data and the mutually agreed correct version.

For the first time, blockchain introduced a way to keep data that is always secure, available and tamper-proof. In contrast to centralized systems, this means the blockchain network never goes offline and data retrieval is easy.

 

Universally Applicable

Last but not least, the technology behind cryptocurrency is universally applicable.  Blockchain’s unique method of entering and retrieving data with  tamper-proofing is being leveraged beyond simple monetary applications. The technology is being used in every conceivable industry and sector you can think of. From the next generation of the internet to the global supply chain, blockchain has cemented its place in the world.

When it comes to discussing the future of blockchain, I would simply say this — it is the future.

Alex T

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