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Basics of Blockchain and cryptocurrency

Bitcoin and cryptocurrency

A cryptocurrency is a medium of exchange, which is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of funds. Bitcoin is the name of the best-known cryptocurrency. It is decentralized and is purely digital. These virtual coins are exchanged directly between two parties online with no middle man. Unlike modern fiat money, Bitcoin is not controlled or backed by any bank or central government authority.

Of late the buzzword ‘Blockchain’ has been making rounds. The Blockchain is an undoubtedly ingenious invention of a person named Satoshi Nakamoto whose identity is still a mystery [1]. Blockchain is a Decentralized Technology which is used to process the Digital Transactions based on distributed ledger technology. It is essentially a Database or Public Ledger to record all Cryptocurrency Transactions. Distributed Consensus and anonymity are the two most Important characteristics of Blockchain. There is no third party involved to mediate the transaction. Blockchain has a Potential to revolutionize the digital payment system.

Working of Blockchain

Now, coming to the working of a Blockchain, User initiates the Transaction using Digital signature. Each Transaction is Represented as block. Transaction is broadcast to every node on the network and these nodes approve the Validity of the transaction. Once the transaction is validated, Blocks are connected to the chain and Entry is made in the ledger. Finally, Transaction is received by Receiver. When the transaction is Broadcast on the Nodes, two main verification activities are done. firstly, owner of the cryptocurrency that is the digital signature of transaction is verified. Secondly, it is checked if it spender has enough money in his account to make the payment.

Basics of Blockchain and cryptocurrency

Security in a Blockchain

The records on a Blockchain are secured through cryptography. Participants have their own private keys which is used to initiate the transaction. Transaction is signed using the Digital Signature of the sender. Receiver verifies the digital signature. i.e. ownership of private key is verified by using the public key of the sender. The signature will become invalid and network will know right away that something is suspicious if record is altered during a transaction.

Owing to the decentralized and distributed nature of Blockchain, there is no single point of failure and transaction cannot be changed from a single computer. It would require enormous computing power to access every instance of a certain Blockchain and alter them all simultaneously.

Applications of Blockchain in financial and non-financial sector

Application of Blockchain is not only limited to Financial sector. Rather they have varied applications in Non-financial domains developed by Blockchain development company as well. In case of banking, Blockchain enables highly secure payment processing with lower cost eliminating the need of intermediaries. Money transfers, Record keeping and other back-end functions become easy, digital, decentralized. 

Potential applications of Blockchain in non-financial institutions include Governance, Healthcare, Iot, Data management etc. Distributed database technology could bring full transparency to elections or any other kind of poll taking by making the results fully transparent and publicly accessible. In case of healthcare patient’s encrypted health information could be shared with multiple providers without any risk of privacy breach. In case of Iot, Smart contracts make the automation of remote systems management possible. Sensors can exchange data through Blockchain wherein lot of overhead cost can be reduced since there is no involvement of any intermediary.

Public and Private Blockchain

There are two main variants of Blockchain Public and private. These two types are distinguished based upon the criteria of participation in the network. Public Blockchain is open and public to all and no one is in charge here. There is no access or rights management done for a public Blockchain and anyone can be the part of the consensus (agreement). Bitcoin is an example of Public Blockchain. Private Blockchain on the other hand allows known organizations to join. In public Blockchain is designed on the principle of anonymity however in private Blockchain participants in the network know exactly who they are dealing with.

For a transaction to be added to a Blockchain, network participants must agree that it is the one and only version of the truth. That is done through consensus, which means agreement. Bitcoin is the most renowned example of a public Blockchain in which the agreement is achieved through “mining.” In Bitcoin mining complex cryptographic problem is solved to create a proof of work. [5] Alternatively, a private Blockchain consists of a permissioned network in which consensus can be achieved through a process called “selective endorsement,” where known users verify the transactions.

Type Public Private
Access No permission required Qualified user via online approvals
Typical Implementation As a public Blockchain application Via a private Blockchain implementation
Innovation Target New business models Processes within existing relationships
Blockchain Governance Public consensus Controlled by a single owner
Number of Users Millions Hundreds of thousands

Pros and cons

Bitcoins are decentralized and is purely digital. Virtual coins exchanged directly between two parties online with no middle man. Unlike modern fiat money, Bitcoin, is not controlled or backed by any bank or central government authority. Therefore, Blockchain have potential to reduce transaction fees significantly. Changes to the Blockchain is publicly viewable by all the parties creating transparency and all transactions are immutable, meaning they cannot be altered or deleted. Due to its decentralized nature there is no central point of failure.

However, there are shortcomings in Blockchain. Huge computation power is required to process the transaction. The generation and verification of digital signatures in decentralized system is computationally complex, and constitutes the primary bottleneck. There is a Substantial amount of power consumption required for mining of bitcoins. Transition from traditional banking to Blockchain would require huge efforts and large amount of Capital Investment.

Pros Cons
Chances of security breach is very low Huge Computing power is required to process the transaction
There is no third party involved to mediate the transaction Technology of Blockchain is widely accepted across the globe
Any change in the Blockchain is viewable. Transition from traditional Banking to Blockchain might involve lot of challenges
Lot of overhead cost is reduced. Transaction Processing is very slow.

[1] https://blockgeeks.com/guides/what-is-cryptocurrency/
[2] https://blockgeeks.com/guides/what-is-blockchain-technology/
[3] https://www.pwc.com/us/en/industries/financial-services/fintech/bitcoin-blockchain-cryptocurrency.html
[4] https://www.fool.com/investing/2018/01/10/the-basics-of-blockchain-technology-explained-in-p.aspx
[5] https://www.ibm.com/blogs/blockchain/2017/12/blockchain-security-what-keeps-your-transaction-data-safe/