The rise of blockchain and cryptocurrency
Blockchain and cryptocurrency are increasingly popular.
Blockchain, cryptocurrency and other fintech have been under development at an astonishing speed and keep changing the world and our daily lives. For example, we are using electronic money so often that we even now give the red pocket in the e-form at the Chinese New Year. Just ask yourself, how long has it been since we used physical banknotes and coins? Now we just pay by taping the Octopus card or scanning the QR code. Credit cards and smartphones have already replaced banknotes and coins.
It is not so hard to imagine that in the foreseeable future, cryptocurrencies will become so common in our daily lives on a global scale. While different worlds in the metaverse are on the rise, such as Decentraland and Sandbox, they all operate on the technology of blockchain. Blockchain is also the core fintech for all cryptocurrencies. But what is blockchain? How does it work? What is the principle behind it? The following article will explore them in detail.
Blockchain is a ledger, not currency
Blockchain is a ledger.
To understand blockchain, we can think of it as a ledger with records of different transactions. Unlike traditional records that only record the parties, dates and amounts of transactions, blockchains also contain a cryptographic hash function for each transaction.
This "cryptographic hash" contains information about the previous transaction, which also contains its previous transaction information, linking together. So, although the latest cryptographic hash is uncovered by mathematical computation from its previous cryptographic hash and the latest transaction data, actually it can be seen as linking all previous transaction data. And each cryptographic hash is unique.
Through this cryptographic hash, different blocks (transaction records) are linked together, so the whole system is called the block "chain".Thanks to this unique encrypted hash, any changes to transaction data must also change the data of all traders in previous transactions, because they also keep their ledgers. The system will also compare all the past records held by those traders during verification, making any change extremely difficult, nearly impossible. This is what makes blockchain "decentralized" as no one or organization can manipulate it.
What is bitcoin mining?
Bitcoin mining is solving increasingly difficult math questions.
What is bitcoin mining we hear so often nowadays? When we think of mining, many of us may picture macho gold miners wandering in the wild west of America wearing Levis jeans and carrying a big iron shovel, to mine those scarce “Bitcoins” by sieving through sand from the icy creek.
No way! In fact, mining in cryptocurrencies is never like gold mining. In essence, cryptocurrency mining is a series of trial-and-error to uncover the new cryptographic hash that can contain the information of the new transaction together with those old hashes.
For example, you are now assigned a task of opening a safe without any clues about the password. The password can comprise any numbers, strings, symbols, and with any length. There is no restriction of the number of trials, so you start with a combination. If you fail, then move on with another combination, and so on until the safe is opened.
When this problem is solved, a new cryptographic hash is created, a new transaction is officially completed, and the blockchain is extended. Mining is the process of obtaining this new cryptographic hash. So, you can imagine the time taken for mining will be longer with the increasing number of transactions of that blockchain.
How about bitcoin?
So where does bitcoin come from? Bitcoin is actually a by-product of mining. When a new cryptographic hash is successfully generated, the miner will be rewarded with a new block in the Bitcoin system. This new block is known as Bitcoin, the “gold”.
Since the total number of bitcoins issued is set at 2,100,000, the number of remaining blocks can only decrease with time and mining, therefore the number of bitcoin miners receive, i.e. new blocks, can only be fewer and fewer, about at the rate of halving in numbers every four years. In addition, the computation time required to generate the new cryptographic hash will inevitably increase due to the number of transactions in the block to which it belongs, so the resources required for mining (e.g., electricity, time) will definitely increase and become less and less cost-effective.
When the question is solved, one will be rewarded with a new block, bitcoin.
In view of this drawback, other cryptocurrencies therefore came to exist. One of which is Ethereum (ETH). Unlike Bitcoin, Ethereum does not have a so-called total issue amount. Another feature of Ethereum is the smart contract. It allows different databases to interact with each other at low cost, and still retains its decentralized and hard-to-tamper nature.
Therefore, some people believe that in the future, Bitcoin will be the holy grail for holding assets, like gold in the real world; while Ether, the currency of Ethereum, will play the currency role for daily transactions. In fact, besides Bitcoin and Ether, there are also many other types of cryptocurrencies, such as Dogecoin, Shiba Inu coin (SHIB), etc., all use blockchain as the core technology.
Different kinds of cryptocurrency, all are based on blockchain technology.
By now, you should have understood that unlike the currencies we know, the so-called "cryptocurrency" is not really an electronic currency, because the latter is still backed by so-called real assets. Historically, for example, the world's major currencies, such as the U.S. dollar or the British pound, have been based on the gold or silver standard, meaning that they are pegged with these precious metals.
Nevertheless, cryptocurrencies are actually only a ledger created and appended by people at each transaction, attached with a unique cryptographic hash. However, because of this cryptographic hash, this ledger is encrypted and authentic, and thus can carry the function as money as well.
With the ledger kept by multiple parties, authenticity can be ensured.
The advantages of blockchain
Therefore, the advantages of blockchain are decentralization as different people keep the same ledger, making manipulation and tampering impossible. Cryptocurrency is just one of the many applications of blockchain. In fact, blockchain can be applied in a wide range of situations, such as in medical records, court files, academic certificates, etc., those documents requiring authenticity and accuracy.
In investment, we have already seen blockchain being applied to Non-fungible tokens (NFTs) and their artifacts. Although still at its infancy, it is not difficult to imagine the advantages of using blockchain to make artworks impossible to be fabricated. In a few years, NFTs will also be very popular, and we will discuss it in a separate article. In addition, copyright maintenance can finally be realized by blockchain technology. For games or virtual worlds, blockchain can help players own assets inside their games, and even serve as the deed of the land bought, apart from simply handling currency transactions there.
If we and our kids acquire the knowledge early, we can keep abreast with the times and not be left behind in the foreseeable future.
Blueinno's blockchain course gives kids an in-depth understanding of how it works and a taste of what it's like to "mine" cryptocurrency by themselves! If you are interested, please click the following link to learn more.