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If you have heard of bitcoin, you would know that it’s a cryptocurrency. And when you hear about cryptocurrency, chances are you would know that it is a type of digital currency. It has no physical form or tangibility.
A similar term called cryptography is also read, heard and used when we try to look for information about bitcoin. It may sound a bit technical, but bitcoin and other digital assets run on blockchain technology powered by the notion of cryptography.
If anyone wishes to learn why bitcoin or any other crypto asset fluctuates, they need to know the basics of the underlying concepts of blockchain. In this blog, we will talk about the four concepts that are making blockchain and cryptocurrencies possible.
The four principles are:
Decentralised governance: Blockchain comprises two very simple and easy to understand terms, block and chain. A block is nothing but a set of transaction data. Then, multiple blocks of transaction data are linked sequentially to form a chain. Imagine this to be a physical ledger where the students’ records are registered, and one page is linked to another page to create an entire ledger book.
Blockchain works on the basic concept of ‘decentralised governance’. Wait, what? Unlike a bank, which has the sole authority to maintain and generate the account statement, the blockchain doesn’t have a head, party, country, or group as the authority. It is public, and the governance is distributed. Hence the basic concept of blockchain is that it is decentralised.
Distributed ledger: The only difference between a bank transaction and a blockchain transaction is the visibility of the data, records and information stored on the block. Blockchain is a public ledger and not a private one, meaning every transaction registered on it is made visible to anyone. You might think that if the data is made public and the ledger is distributed, there are high chances that the data would be tempered and made use of, your money could be stolen, or anyone would know how many assets you hold. However, it is nothing like what you think. A centralised ledger is more susceptible to data loss, security breach, manipulation and cyberattacks than a distributed ledger. Attacking a single authority is more unrestricted than attacking multiple nodes (servers, systems, or powerful computers). Each transaction detail on a distributed ledger is secured using the concept of cryptography.
Cryptography: Cryptography is a very recent concept in the world of computer technology. As the Internet grew in the early 1990s, data, files and government information transfer became faster and easier. There was a high need to secure the network, communication modes, and the transfer of information. Hence, cryptography came into existence 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 data recipient. Those with this private key can ‘unlock’ the encrypted data and get the information. Generally in cryptography, generating a private key involves complex codes in binary form (only 1 and 0) that form very long strings (say 256 characters long), making it practically impossible to guess. Cryptocurrency holders generally have a private key that enables them to do an outgoing transaction. Hence, blockchain-backed currencies are called cryptocurrencies.
Game theory (mining): When we hear about the term bitcoin, one person that comes to our mind is Elon Musk. He, in 2021, tweeted that Bitcoin and crypto assets are great ideas, but they cannot be promoted at the cost of the environment. It is because bitcoin and other crypto-assets involve mining. However, it is not the same as gold or diamond mining.
Mining in the realm of cryptocurrencies refers to the validation of transactions. Those who validate transactions are called miners. Since millions of transactions happen daily, one person or limited human groups cannot validate every transaction. Also, a regular computer cannot be used for mining. Hence, hardware and software specifications are required in a computer to validate transactions faster. This process consumes a lot of electrical energy, which is more than sufficient to power many third world countries.
Mining is one of the core concepts of blockchain, as it is one of the most crucial aspects that provides security to the transactions and supports all the above three concepts. Mining is important because it confirms new transactions and prevents double-spending by bad actors in the blockchain. Mining is painstakingly difficult. But if you wish to know which are the top ten cryptocurrencies that are easiest to mine, you can find the blog article here.
Currently, the miners are doing the transaction processing for free. However, they do have an incentive. It is generally the newly created coins on that particular blockchain that is being rewarded to the minders. As we see the price of cryptos increasing, we will also have more miners attempting to mine the cryptocurrencies, strengthening the transaction processing.