Even if you are new to crypto, you have probably heard the term blockchain mentioned. But, as with all the new terms and jargon you are learning in the crypto world, you may still have questions.
We’ll dig a little deeper into blockchain technology, its place in the crypto world, and what you need to know before investing in Bitcoin, Ethereum, and other cryptocurrencies.
What is blockchain technology?
The most simplified way to view a blockchain is a database. It stores information in a digital format. The technology has been adapted for many applications from this starting point—any occasion where data needs to be stored securely and information shared.
Of course, the best-known application of blockchain technology is cryptocurrency. A blockchain maintains a secure, decentralized record of all transactions among the nodes of a computer network.
Bitcoin is the most famous example of a cryptocurrency secured by blockchain. The technology generates trust and security without the need for a third party to verify transactions.
How does blockchain work?
It’s called blockchain because it is a chain of blocks that contain information. Each new block in the chain is populated with data. Once the data has been added, the block is closed and linked to a previously filled block in the chain. The process repeats for any new data added to the chain, creating a timeline of data.
A blockchain can be used for any type of data, but the most common application has been as a record of transactions. One reason it is favoured is that transactions are recorded on a distributed ledger, which is entirely open to anyone. Though anyone can view it, they can’t edit the information stored in the chain.
To understand the secure nature of the blockchain, it is essential to understand the other components of a block. In addition to the data, a block also contains a hash and the previous block’s hash.
If we take Bitcoin as an example, the data stored in a block would contain the sender, receiver, and amount of coins exchanged during a specific Bitcoin transaction. The hash is like a fingerprint. It is a unique identifier of that block in the blockchain, made up of a string of numbers and letters.
The final element is the previous block’s hash. If you tamper with a block in the chain, that hash will change. It will invalidate the next block, the one with the previous block’s hash. That will cause a chain reaction of invalid hashes down the chain. It signals that there has been tampering at some point in the chain and generates a level of alarm.
What is cryptography?
Cryptography is another term you may have heard mentioned in tandem with blockchain technology. Cryptography is sending secure, encrypted messages between two or more parties. It allows transactions to be anonymous while remaining secure without the intervention of a bank, government, or another third party.
Public-private key encryption is used to unlock this communication and prevent double-spending of cryptocurrency. For example, you are given a private key and a linked public key when purchasing Bitcoin. The private key is like a banking PIN. It grants you, and only you, access. Your public key is shared with anyone sending you cryptocurrency. This information authenticates your block on the blockchain and allows the network to grant you access.
What makes blockchain secure?
Several factors make blockchain technology secure. In addition to the structure of the database, it is also decentralized. There is no single point of failure in the ledger. Instead, a blockchain is spread among several network nodes at various locations.
If there is one fail point in the system, let’s say someone is trying to tamper with the information, the other nodes in the network would not be altered and would prevent that tampering. Because the record is public, the network could pinpoint the exact location of the tampered information.
Though the information is public, it is encrypted. Only the owner of a block can reveal their identity using their public-private key, allowing for the double function of transparency and anonymity.
For a hacker to steal Bitcoin from the blockchain, it would require them to take control of 51% of the copies of the blockchain. This type of attack would require a staggering amount of money and resources, as they would have to alter all the timestamps and hash codes on a massive amount of blocks. With the size of most cryptocurrency networks, this type of hack is close to impossible as you can get.
How to invest in blockchain technology?
Many investors see the multifaceted uses of blockchain as an emerging technology with staying power. There are many potential applications of a secure, decentralized, encrypted database, from smart contracts to supply chain management to securing health records. Because of the potential for greater adoption, some investors want to put their money into blockchain technology.
Some investors view the underlying technology behind crypto as a safer and less risky option than investing in crypto. This confidence in businesses backing blockchain technology is because it can provide technology for several use cases, not just one.
There are several ways to invest in blockchain technology, including an ETF specializing in investing in companies exposed to the blockchain. Amplify Transformational Data Sharing ETF and Reality Shares NASDAQ NextGen Economy ETF are two examples.
The future of blockchain technology
Blockchain technology already has a stronghold on creating a decentralized, secure ledger to record and verify financial transactions in the cryptocurrency world. Still, it is expected that blockchain will expand into many new frontiers.
As an emerging technology, it is exciting to imagine how this technology could impact our day-to-day lives and help save us time and money and solve many data security problems.
