Posted on: 23 February 2018
The year when digital currency and its underlying technology went mainstream
The digital currency, Bitcoin and its underlying technology, Blockchain became mainstream in 2017, dominating news headlines as its use proliferated and value fluctuated. But what are digital currencies and why use them?
Blockchain, it’s the new buzzword, it’s on trend and it’s often described as the next big thing, a revolution of the internet as we know it. But what actually is Blockchain other than a term thrown around by professionals in meetings to make them look, well, professional?
Digital currency and its Blockchain technology has the potential to revolutionise the way we do business. The future of online transactions could shift focus to digital currencies, but does this digital phenomenon have the power to become the future of trading? What is this digital currency actually worth and how do we get our hands on it?
We’ve taken a look at the ins and outs of this digital marvel, taken out the jargon and translated it into everyday lingo.
What is digital currency?
Digital currencies, like Bitcoin, do not exist in a physical form that we are used to with government backed banknotes or coins. However, like conventional currency such as pounds or euros it can be used to buy goods or services electronically.
Bitcoin is the first example of a growing category of money known as cryptocurrency.
What makes bitcoin different from traditional currencies?
Traditional currency is usually backed by a physical asset such as gold or the economy in which it is accepted. However, bitcoin is based on mathematics. Anyone can create bitcoin by using software programmes that calculate a known complex mathematical formula known as ‘mining’.
The bitcoin protocol dictates that only 21 million bitcoins can be mined. At the time of writing following a sudden decline in value, a single Bitcoin is worth around £7,800, down from its highest value of over £14,700 in December 2017, illustrating the volatility of this virtual currency.
The bitcoin network is decentralised, meaning that the digital currency isn’t controlled by one central authority. Every computer that is used to mine bitcoin also processes transactions in the bitcoin network. So if part of the network goes offline, other computers can still process and verify money transactions.
Unlike traditional bank accounts, anyone can create a bitcoin wallet without it being linked to a physical name, address or other personally identifiable information. This layer of anonymity has historically associated Bitcoin with the dark web, an underground community online that plays host to illicit and immoral activities. Whilst it is not recognised as an official currency, the use and exchange of Bitcoin is becoming more and more accepted worldwide. How it fits into current regulatory frameworks is still being decided but for the time being Bitcoin is becoming recognised as a digital asset.
How is digital currency earned?
Digital currency can be secured in a number of different ways. It can be bought at some specialist ATMs, swapped at a digital currency exchange, accepted as payment for goods and services or can be ‘mined’ by using the processing power of your own computer to support the currencies network. A user just needs to set up a ‘wallet’ to store currency and away they go.
Experts realised the new technology that sat behind cryptocurrencies such as Bitcoin, could revolutionise digital transactions and could also be applied to other methods of transacting business between organisations worldwide. Online ledgers track digital transactions or records and consequently Blockchain has been born into the digital era.
What is Blockchain?
Blockchain is a collection of digital information or records that was created by an individual or group of individuals under the pseudonym of Satoshi Nakamoto. It could be explained as a type of archiving and essentially it’s a growing list of records transacted online, otherwise known as blocks. Each block becomes a record of a transaction thus the ledger has coined the name Blockchain.
Why use Blockchain?
Blockchain technology has been hailed as one of the most secure methods of updating records as it is almost impossible to modify or hack the data contained in each block. It allows users to transact directly using complex encrypted coding (cryptography) through a decentralised database. It skips the middle man such as a bank or approver and manages transactional trust on behalf of each party.
Data is distributed but not copied and each transaction is authorised and authenticated by a network of ‘nodes’. Once this transaction has been recorded, it cannot be altered without the authentication of all the subsequent blocks making it potentially one of the most secure methods of transacting business to date.
How does Blockchain work?
Blockchain works through digital authentication and authorisation of online transactions. Every party or ‘node’ in the chain has a complete record of previous transactions and has to approve and endorse new transactions. This means that altering the history of a ledger from a single point becomes almost impossible because it requires the same level of validation from all the nodes in the chain.
Example of how blockchain works for a digital currency transfer:
What is cryptography?
Cryptography uses complex mathematical coding to encrypt data so that it can only be deciphered by those it’s intended for. The sender uses an encryption key to scramble data and a key is also required to unlock or decrypt the data so the recipient can read or process the information.
How could Blockchain affect my business?
Although blockchain is often linked to digital currencies that use it as its underlying technology, blockchain has already been embraced by many organisations as a method of securely transacting business, exchanging goods or services or storing records in a decentralised database.
Advantages and disadvantages of blockchain
- High quality of data and records
- Reliability and longevity
- Trust and integrity of the process and the data
- Reduced costs by removing the middleman
- Thorough and complete history of records
- Slower than a centralised database
- Work must be conducted at each touchpoint, potentially making it a lengthy process
- Blockchain data still needs to be verified before it is uploaded as it could still be susceptible to human error
- Blockchain networks consume large amounts of energy and require substantial computer power
- Digital currencies, which use blockchain technology have uncertain regulatory status which may impact future blockchain implementations.
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