In the year 2017, returns on Bitcoin investments were 200% making millionaires of many investors. Investing in Bitcoins became very popular as it was rewarding, and the path-breaking technology behind Bitcoins was blockchain. So before investing in Bitcoins and other blockchain-based cryptocurrencies, you must have a clear idea about it.
What is Blockchain?
A blockchain is a chain of electronic blocks that store relevant data of the customers. Unique digital signatures ensure the security of the stored data. You cannot change the original data of a single block without disturbing the other blocks of the blockchain. Anyone who wishes to access the data needs to have the signature.
Understanding the Concept of Blockchain
Transaction Record
Now, to understand how your data gets stored in a blockchain, take the example of Bitcoins. Every Bitcoin block stores 1 MB of data. When a user records a transaction in Bitcoins, it gets stored in the electronic block. Another user can access this transaction record but cannot edit it. The data of different users get stored in separate blocks that join together to form a chain. At this moment, there are 525,000 blocks in the Bitcoin blockchain, storing 525,000 MB of data.
Unique Digital Signature
Every block in a blockchain has a unique digital signature called a hash. It matches the exact string of data stored in that block. If you change any of that data, you have to change the digital signature also. With this block, you need to change the digital signatures corresponding to each block that forms the blockchain, which is close to impossible.
Creation of Hash
In blockchain technology, a hash secures the transaction data. In other words, the digital signature that protects the data in a block is created by a cryptographic hash function. The data you enter passes through this cryptographic formula, and a 64-character output gets generated. This cryptographic hash consists of numbers and alphabets. Changing a single character of the string will change the output. Also, the hashes need to meet some specific conditions.
How to get a Signature that Qualifies?
A block needs to have a signature that starts with ten consecutive zeros to qualify for a blockchain. As every signature is unique, there will be only one signature corresponding to a block. So you may not get the qualifying hash many times. The cryptographic hash function may generate an output that does not start with ten zeros. In such a case, you have to keep on changing the data until you get an eligible signature.
The transaction information, date stamp, and block number can’t be changed. So, users add a string of numbers called nonce to their data. The nonce is continuously changed to get a qualifying signature. This process is called mining, and the people doing it are miners. Miners change the nonce very quickly by using computational power that works on electricity. It is a trial and error method.
You can also become a miner by using mining software. It uses computational power and tries to solve the nonce for a particular block. But finding a nonce is very difficult, it needs a lot of computational power and also luck.
How is the Blockchain Secure?
Your data stored on the blockchain is immutable. A corrupt miner can never get to your data as he has to change the digital signature of all the blocks in the chain. Also, new blocks get added every second, as many users are working at the same time on the network. So, the corrupt miner will need computational power more than that of the whole network, which is not achievable.
Who Regulates the Blockchain?
Blockchain technology follows a democratic model. No government or centralized agency controls it. Users update the transaction records of Bitcoins and other cryptocurrencies on the blockchain. Here, a change in data gets rejected by the network as it is not connected to the chain. Although anyone can access the transactions and wallet balance, the names of the owner remain hidden.
Future of Blockchain-based Cryptocurrencies
Different cryptocurrencies have different blockchain protocols. This means Bitcoin has a distinct set of rules and regulations for its blockchain that is not the same as other cryptocurrencies.
If you take the Bitcoin, it is like a currency that you can use as global money. On the other hand, Monero is a more private cryptocurrency. Its transactions and wallet balances are non-traceable.
In the future, cryptocurrencies can act as a token for making digital payments. It can have a value and be used to buy gaming access or pay utility bills like water and electricity. All the different cryptocurrencies can be traded on global exchanges like Binance. It can become the next internet money.
Blockchain technology can safely store data for identities, tax records, history records, and medical records. Even property rights and shares of a company may get registered using blockchain.