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If you’ve heard of bitcoin, you know that it’s a cryptocurrency. And when you hear about cryptocurrencies, you probably know that it’s a kind of digital currency. It has no physical shape or tangibility.
A similar term called cryptography is also read, heard, and used when we try to search for information about bitcoins. It may sound a little technical, but bitcoin and other digital assets work with blockchain technology driven by the notion of cryptography.
If you want to know why bitcoin or any other cryptocurrency asset is floating around, you need to know the basics of the blockchain. In this blog, we will talk about the four concepts that are making blockchain and cryptocurrencies possible.
The four principles are:
Decentralized governance: Blockchain comprises two very simple and easy to understand terms, block and string. A block is nothing more than a set of transaction data. Then, several blocks of transaction data are linked sequentially to form a string. Imagine that this is a physical record where student records are recorded and one page is linked to another to create a complete ledger.
Blockchain works on the basic concept of “decentralized governance”. Wait, what? Unlike a bank, which has sole authority to maintain and generate account statements, the blockchain does not have a leader, party, country, or group as its authority. It is public, and governance is distributed. Hence the basic concept of blockchain is that it is decentralized.
Distributed ledger: The only difference between a banking transaction and a blockchain transaction is the visibility of the data, records, and information stored in the blockchain. Blockchain is a public and non-private ledger, which means that all transactions recorded in it are visible to anyone. You might think that if the data is made public and the book is distributed, there is a good chance that the data will be tempered and used, that your money will be stolen, or that someone will know how many assets you have. However, it doesn’t look like what you think. A centralized registry is more susceptible to data loss, security breach, manipulation, and cyberattacks than a distributed registry. Attacking a single authority is more unrestricted than attacking multiple nodes (powerful servers, systems, or computers). Every detail of the transaction in a distributed ledger is protected by the concept of cryptography.
Cryptography: Cryptography is a very recent concept in the world of computer technology. As the Internet grew in the early 1990’s, the transfer of government data, files, and information became faster and easier. There was a great need to protect the network, the modes of communication and the transfer of information. That’s why cryptography has emerged to make the entire Internet more secure. Cryptography works on the concept of keys. It is like a code that the sender of the information only shares with the recipient of the data. Those with this private key can “unlock” the encrypted data and get the information. Generally in cryptography, the generation of a private key involves complex codes in binary form (only 1 and 0) that form very long strings (say 256 characters), which makes it virtually impossible to guess. Cryptocurrency holders usually have a private key that allows them to make an outgoing transaction. Therefore, blockchain-supported currencies are called cryptocurrencies.
Game theory (mining): When we hear about the term bitcoin, one person that comes to mind is Elon Musk. In 2021, he tweeted that Bitcoin and cryptographic assets are great ideas, but cannot be promoted at the expense of the environment. This is because bitcoin and other cryptocurrencies involve mining. However, it is not the same as mining gold or diamonds.
Cryptocurrency mining refers to the validation of transactions. Those who validate transactions are called miners. Because millions of transactions occur daily, a limited person or human group cannot validate all transactions. Also, a normal computer cannot be used for mining. Therefore, hardware and software specifications are required on a computer to validate transactions faster. This process consumes a lot of electricity, which is more than enough to power many third world countries.
Mining is one of the key concepts in the blockchain, as it is one of the most crucial aspects that provides security to transactions and supports the above three concepts. Mining is important because it confirms new transactions and avoids double spending by bad actors in the blockchain. Mining is meticulously difficult. But if you want to know which are the ten easiest cryptocurrencies to extract, you can find the blog article here.
Miners are currently processing transactions for free. However, they do have an incentive. It is usually the newly created coins in that particular blockchain that are being rewarded by caregivers. As we see the price of cryptocurrencies rise, we will also have more miners trying to undermine cryptocurrencies, strengthening transaction processing.