Bitcoin is the digital currency that was on a roller-coaster ride until the end of 2017. It has since settled down somewhat but investing in Bitcoins remains fraught with risk.
This is also true for other cryptocurrencies such as Ethereum and Litecoin.
What makes Bitcoin possible is an underlying technology known as blockchain. A blockchain is made up of a series of data blocks, which are recordings of transactions like an old-fashioned ledger. These blocks are connected forming a chain. Unlike a single ledger book, a blockchain is distributed across a network, such as the Internet. Computers on the network that are part of the blockchain are called nodes. They act as both consumers and providers of data to their peers, like a BitTorrent network.
The attraction of blockchain is that it facilitates the transfer of assets, such as digital money, between two parties that don’t have to trust one another. Traditionally, if you want to send money to someone, you pay by credit card or use a wire transfer. Both mechanisms require a trusted third party, such as a bank or a securities clearing house, to act as an intermediary. This adds cost to the transaction, and it takes time, which is one of the reasons it takes 3-4 days for stock market transactions to settle.
With blockchain, the transaction can be completed securely and verifiably in a matter of minutes.
The security in a blockchain is provided by special nodes on the network called “miners.” These nodes compete with one another for financial rewards (e.g., new Bitcoins) and to be the node that is allowed to update the blockchain with the record of a transaction.
They compete by solving increasingly difficult mathematical problems. There are now thousands of computing nodes in the Bitcoin blockchain that burn through enormous amounts of electricity to run special-purpose hardware that is optimized to solve cryptographic puzzles.
A blockchain is also transparent, in that all nodes can see every transaction. A copy of the entire blockchain is held at miner nodes. This chain can become quite large. According to Statista.com, the size of the Bitcoin blockchain has been growing since the virtual currency was created in 2009, reaching approximately 173 gigabytes by the end of June 2018.
Some of the most interesting uses of the blockchain are in areas other than Bitcoin. For example, in government, voting records can be kept in a blockchain that everyone can see, but no one can hack. Or in real estate, where land transfers can be recorded in a blockchain to speed up the closing process. Blockchain has the potential to be a truly transformative technology.
Scott Tilley is a professor at the Florida Institute of Technology in Melbourne. Contact him at [email protected]
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