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What is Blockchain Technology? 

 January 30, 2022

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Blockchain technology’s impact could be enormous. In November 2021, the market cap of cryptocurrency was $3 trillion, with the cost of one bitcoin reaching the high of $68,000. Major corporations, like Walmart and Pfizer, have successfully completed blockchain pilots, and several more working with projects ranging from remittances and title transfers. Blockchain technology is expected to increase in importance.

Let’s begin by defining broad terms:

How does blockchain work?

Blockchain technology allows for non-trusted parties to come to an agreement on a common digital history. The common history of digital assets is crucial due to the fact that digital assets and transactions can be easily duplicated or faked. Blockchain technology helps solve this issue without the need for an intermediary with trustworthiness.

This explanation will provide basic definitions and analogies of blockchain technology. It will also explain Bitcoin, Bitcoin Cash, Ethereum, Litecoin, Dogecoin, Cardano, XRP, stablecoins, and tokens that are non-fungible and decentralized autonomous organizations Blockchain, Initial coin offerings. We’ll discuss promising applications that blockchain technology can be used for.

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(For an in-depth look at the way Ethereum operates we recommend reading us What is Ethereum explanation.)

In addition, this report will highlight the distinct features between blockchain technology and distributed ledger technology and show instances where these technologies could have an application, and also when they don’t.  Bitcoin X is usually the precursor to the same.

Bitcoin

What exactly is Bitcoin?

Bitcoin is, in accordance with its whitepaper described as a “peer-to-peer digital cash network” that “allow[sthe online payment to be transferred directly from one person to the other without the need of the financial institution.”

In 2008, the financial meltdown led many people to abandon faith in banks as trusted third parties. A lot of people questioned whether banks were the most reliable guardians of the financial system worldwide. Investment decisions that were not prudent by major banks could have been catastrophic with ripple effects.

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Bitcoin — which was also suggested by 2008 offered an alternative.

Bitcoin enabled digital transactions without the need for a “trusted intermediary.” The technology made it possible for this to take place at a massive global scale, with cryptography executing what institutions such as financial regulators, commercial banks, and central banks had to check that transactions are legitimate as well as ensure the security of the base assets.

Bitcoin is an open, decentralized public ledger. There is no third party that can be trusted who controls the ledger. Anyone with bitcoin is able to take part in the blockchain, send bitcoin and receive bitcoin, and even have a copy of the ledger should they wish to. In this sense, this ledger can be described as “trustless” and clear.

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The Bitcoin ledger is a record of only one asset: bitcoin. (Note: “Bitcoin” capitalized refers to the Bitcoin ledger or the protocol, and “bitcoin” in lowercase is referring to the currency or account number in the Bitcoin ledger.)

The ledger is governed by rules that are embedded in it. One of these stipulates that there can only ever be 21 million bitcoins produced. Due to this limit on the number of bitcoins available The cryptocurrency was constructed to resist inflation that is caused by the lack of shortage. Bitcoins can’t be created at will and decrease the price of the coin.

Each participant must accept the rules of the ledger in order to utilize it.

Bitcoin is decentralized politically -there is no central authority that runs bitcoin, but everyone involved (nodes) are in agreement about the status of the ledger as well as its rules.

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A transaction or bitcoin cannot be erased, changed, altered copied, or altered Anyone who is on the platform will be able to discern.

It’s that simple that’s it, and it’s a major deal.

A story about Alice and Bob

To fully understand the way this peer-to-peer electronic cash system permits online transactions to transfer between parties without the need for an institution of finance Let’s look at a basic illustration.

Here’s an example of what could happen: Alice hands Bob a arcade token that is physical. Bob now only has one token and Alice has none. The transaction is completed. Alice and Bob don’t require an intermediary to confirm the transaction. Alice isn’t able to provide Charlie an identical token since she doesn’t have the token she was given -Bob does. Bob is the one who has it.

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But what if this transaction was digital? Alice sends Bob a digital arcade token — via email, for example. Bob is supposed to have the token in digital form, but Alice shouldn’t.

Right?

Not as quick. What would happen if Alice created duplicates of “forgeries” from the token’s digital form? What would happen if Alice placed the identical digital token on the internet for download by everyone? Since the digital token is nothing more than an array of zeros and ones.

In the event that Alice Bob and Bob “own” each other the identical string of zeros and ones Who is the real proprietor of this digital asset? If digital assets are able to be easily reproduced then what is to stop Alice from trying “spend” the same digital asset again by transferring this to Charlie?

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One solution is A ledger. The ledger can track one asset: arcade tokens in digital form. When Alice hands Bob the token in digital form the ledger will record the transaction. Bob is the owner of the token and Alice is not.

Now, they have an additional issue: who’s task will it be to keep the ledger? Alice isn’t able to hold it since she could erase the transaction, and then claim that she still holds the digital token even though she handed the token to Bob. Also, it can’t be Bob since he can modify the transaction and then pretend to claim that Alice handed him two tokens.

Bob and Alice are able to solve this issue with the help of an authorized third party an intermediary who isn’t directly involved in the transaction Let’s name him Dave. Dave will manage the ledger and ensure that it’s updated.

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This is a good thing until it’s not.

What happens if Dave is able to charge a fee neither Alice nor Bob would like to pay? Or, what happens if Alice is bribed by Dave in order to wipe her transactions? Perhaps Dave is looking to get the digital token for himself and then adds a false account to his ledger to steal the money while claiming that Bob handed him the token?

In other words, what happens if Alice and Bob are unable to trust the third party?

Recall your first encounter with a physical object with Alice with Bob. Are there ways for digital payments to appear more like the original?

One way to go is: Alice and Bob could share the ledger with all their trusted acquaintances in the same way, not only Dave, and then reduce trust decentralization. Since it is digital every copy of the ledger would sync together. If a majority of participants are in agreement to the transactions being legitimate (e.g. verify that Alice actually owns the token she would like to transfer) the transaction will be included in the ledger.

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If a large number of individuals have copies of the identical ledger, it becomes harder to cheat. In the event that Alice or Bob was to falsify an account, they’d need to compromise the vast majority of participants which is a lot more difficult than compromising just one person.

Alice isn’t able to declare that she never gave an electronic token to Bob because her ledger wouldn’t be in sync with that of the others. Bob cannot claim that Alice sent him two tokens, as his ledger is out of sync. If Alice offers to bribe Dave to modify the ledger’s copy, Dave only holds an only one ledger. The majority view would indicate that it was a digital token that had been delivered.

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In essence, the distributed ledger function since everyone holds one copy of the digital ledger. The more trustworthy people who are holding the ledger, the stronger it will become.

This ledger enables Alice to transfer an electronic symbol to Bob without the need to pass through Dave. In a way, Alice is changing the digital transactions into one that appears more like a tangible one that is in reality, where the ownership to an item is visible and evident.

How safe is Bitcoin?

You might have noticed an important distinction between the previous instance and Bitcoin. Particularly, Alice and Bob’s ledger allows only “trusted members of the group” to take part. Contrarily, Bitcoin is entirely public and everyone is able to participate.

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How do we get all these suspect “nodes” to accept the current state of the ledger? How can we prevent malicious actors from destroying the ledger?

Let’s consider this for a second. A public ledger could allow for a lot more participants. The more people who participate, the more robust the ledger gets. Right?

You might have realized this isn’t so simple.

Because Bitcoin grows beyond trusted users and lets anyone gain access to it, it can be vulnerable to criminals who attempt fraudulent transactions.

There was the risk of having bad actors when it comes to Bob’s and Alice’s trusted acquaintances: Dave might turn untrustworthy. But, Bitcoin is free and is accessible to anyone, trustworthy or not, just like open Google documents that anybody is able to access and edit.

How can we convince all these suspect “nodes” to accept the current state of the ledger? How can we prevent fraudsters from corrupting the ledger?

Bitcoin is a viable option to make good actors feel good and deter bad actors using the traditional carrot and stick trick.

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In simpler terms, certain Bitcoin participants are rewarded to carry out the dirty work, and also maintain the network. The participants, referred to as “miners” are able to bundle transactions into”blocks,” add the latest transaction to a “block,” add this latest block into the “chain” of blocks prior to it (hence the term “blockchain” is used to define Bitcoin’s unique database structure) and contribute a lot of computing power for the system during the process. In exchange for this work, they are compensated with bitcoin. With one bitcoin that is worth tens of thousands of dollars, it can be an impressive incentive.

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If miners are able to use computing electricity, the miners also consume an enormous amount of energy.

This deters criminals and hackers because “hacking” Bitcoin to get all the coins of everyone would require an enormous amount of computer power electricity and cash. Furthermore, should the Bitcoin community was to be aware of the attack, it could likely result in the value of bitcoin falling significantly. These elements make it more likely that the attack is economically defeatist.

In terms of technology, this mining process generates Bitcoin’s consensus mechanism known as “Proof of Work” which is explained in the following paragraphs.

The goal of Bitcoin’s system is the creation of a ledger everybody trusts, yet nobody is in charge of.

Proof of Working: Bitcoin’s consensus mechanism.

“Proof of Work” (PoW) can be described as the mechanism for consensus that ensures the security of blockchain as well as the validity of the mining of the block, with the goal of establishing trust in a decentralized system.

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To create a new block, miners must solve an intricate puzzle that requires an enormous amount of computing capacity. When a miner has found an answer, the new block is sent to the network to verify and is added to the blockchain.

The nature of cryptocurrency is digital, which can make them susceptible to “double-spending.” In our previous example, one way Alice can cheat Bob is to send Bob a duplicate of the digital token while conserving the actual digital token. A trusted intermediary might track transactions and prevent this double-spend from occurring in a central ledger however, there is no way to oversee this in an uncentralized ledger.

A PoW protocol makes an assault on the Blockchain economically impossible. To be able to carry out double-spend attacks the miner must first create a block of fraudulent transactions and cause a fork to be made in the blockchain. The miner will then require control of at minimum 50 percent from Bitcoin’s Bitcoin network to ensure that the forked blockchain is the primary one. The power required to run PoW is likely to render this method extremely costly, with a cost of $2 million or more each hour in Bitcoin according to Crypto51.

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While the PoW can make the blockchain more secure, it’s simultaneously extremely energy-intensive and raises environmental and ethical issues. The Bitcoin network is believed to consume around 110+ Terawatt-hours (TWh) of power per year. That’s about the amount it is estimated that the Netherlands used in the year 2020 in accordance with researchers at the University of Cambridge.

This PoW strategy has resulted in the development of massive mining pools in nations where electricity is more affordable. The mining operations do not just require a lot of computing power, but they are also extremely optimized, making competition with an ordinary “day miner” extremely difficult. The shift to more centralization of mining led some to doubt whether Bitcoin is really an open-source.

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Are you confused… what exactly is Bitcoin?

Okay, let’s join all of the dots

  • Bitcoin is an uncentralized public ledger. This ledger is also known as the blockchain. There is no third party that can be trusted that controls it. Bitcoin blockchain. Anyone can instead access it or write to it and keep a copy.
  • The Bitcoin blockchain tracks one asset, bitcoin. It has rules for the blockchain one of which is that there can only be 21 million bitcoin. Everyone must accept the Bitcoin rules to utilize it.
  • Because anyone is able to read as well as write on it Bitcoin requires a way to create consensus among non-trusted nodes — in contrast to the distributed ledger of Bob and Alice which is shared with trusted acquaintances. This solution is based on economics:
    • Incentive: First person to verify transactions and commit massive computing power to secure the blockchain will be able to add an entire block of transactions to the previous blocks. The miner who is the first to verify transactions gets bitcoin and the race restarts every 10 minutes.
    • Disincentive: Criminals are discouraged from attacking the blockchain due to its design to be a loss-making concept.
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What are halves?

Halving decreases the amount of bitcoin that is awarded each block for miners to half. Also known as “the Halvening” it happens after every 210,000 blocks are mined within the Bitcoin blockchain, or approximately every four years. In the initial protocol, halvings are utilized to limit the supply of bitcoins and in regulating the value of the cryptocurrency.

Most recently, the halving was the third time in the history of Bitcoin and occurred in May of 2020. The mining reward was reduced from 12.5 BTC per block to 6.25 BTC per block. To investors, this announcement was highly anticipated since the first two halvings were immediately followed by a market that was bullish that was triggered through the mix of increased demand and lower quantity of bitcoin available for purchase.

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In the case of mining companies, these halvings are viewed as a typical way of “culling of herds.” Since halvings can reduce revenue, miners who aren’t as efficient as counterparts are at a greater chance of not being able to recover operating costs.

Is Bitcoin a bubble?

It’s difficult to know.

As mentioned, Bitcoin’s blockchain technology permits creating a unique, rare digital asset in which everyone is aware of the background of each bitcoin.

The value of Bitcoin isn’t in itself it is subject to supply-and-demand mechanisms that are found in every market. If bitcoin’s demand increases the price of bitcoin rises and the reverse is true. Demand can be triggered by many reasons, such as people who are committed to bitcoin’s decentralized philosophy or retail investors who are dumping money into an edgy asset, or institutional investors looking to diversify their portfolios, among other factors.

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In the past, the shift in demand has resulted in extreme volatility in the value of bitcoin which has resembled bubble-like behavior.

In the end, the reputation of Bitcoin in the market as a “bubble” can be judged by the sentiment of investors and whether users remain convinced of the value of Bitcoin over the long term. There is always the possibility of a crash however, it’s not guaranteed.

In the month of October 2021 Bitcoin is worth around $1T+.

What impact did Covid-19 have on Bitcoin?

The global market crash of March 2020, caused by Covid-19 was also responsible for the cryptocurrency prices falling into one of the largest ever declines. The value of Bitcoin dropped by more than 50% within the space of just 24 hours.

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In the months that followed, prices rebounded as did safe-haven assets such as gold, as investors turned for safe-haven assets to combat market volatility. In April 2021 Bitcoin was trading at a cost that was more than $64,000more than 16 times higher than the point at which it was less than a year ago.

Many analysts believe that Covid-19 may have a generally positive impact on Bitcoin demand, as it contributes to cryptocurrency’s reputation as a safe haven asset.

How do you define altcoins?

Since Bitcoin began its journey in 2008, hundreds of other cryptocurrencies, as well as altcoins (“alternative coins”), have appeared.

Since Bitcoin’s source code is open-source Anyone can make use of bitcoin’s software to make an alternative currency. A lot of them are looking to improve Bitcoin or extend the capabilities of Bitcoin. Keep in mind that Bitcoin’s rules: limit the amount of bitcoin to 21 million and employ its Proof of Work system to ensure the security of the network. Different cryptocurrencies have different rules and are able to work with other models of economics.

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A caveat

There’s a lot of additional information about Bitcoin that we won’t get into. Hashes and public-private key encryption segregated witnesses, and chain extensions, as well as other things, are outside within the context of this article.

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