Beginner's Guide: Crypto, Blockchain and Bitcoin - I

Cryptocurrency

A cryptocurrency is a digital, encrypted and decentralized medium of exchange. Unlike the Rupee, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these tasks are broadly distributed among a selected group of individuals on the internet.

As ‘Rupees’, ‘Dollars’ and ‘Yen’ are types of currencies, ‘Bitcoin’, ‘Ether’, ‘Dogecoin’, etc. are types of cryptocurrencies.

You can use cryptocurrency to make purchases, but it’s not a form of payment with mainstream acceptance yet. Hence, people invest in cryptocurrencies as they would in other assets, like stocks or precious metals.

Coinbase, has a special debit card that lets customers spend any Coinbase assets (cryptocurrencies) they own and earn cryptocurrency rewards. BitPay, another firm, offers a prepaid Mastercard debit card that customers can use to spend their digital currency.

Blockchain Technology

What is a block?

Groups of approved transactions together form a block. A block can be recorded and distributed, but can never be edited as the block is permanent. This permanence is called immutability.

There are four main components of a block:

Timestamp: the time and date of the creation of block
Hash: a unique code given to a block
Previous hash: the hash of the previous block
Difficulty: it determines how long it takes for adding next block to the blockchain

What is a blockchain?

“Imagine a book where you write down how much money you spend each day. Each page is similar to a block, and the entire book, a group of pages, is a blockchain” explains Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax.

A blockchain is an open, distributed ledger that records transactions in code. In practice, it’s similar to a checkbook that’s distributed across countless computers around the world. Transactions are recorded in “blocks” that are then linked together on a “chain” of previous cryptocurrency transactions.

Every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger. Here, participant refers to the one who is assigned the work of verifying and managing the transactions – miner. This decentralized database managed by multiple participants is known as Distributed Ledger Technology (DLT).

How are blockchains secure?

Blockchains are secured through a variety of mechanisms that include advanced cryptographic techniques and mathematical models of behavior and decision-making.

Use of 'cryptography' in blockchain security

Blockchains rely heavily on cryptography to achieve their data security. Cryptography is the science of hiding information. It makes use of mathematical theories and computation to encrypt and decrypt data or to guarantee the integrity and authenticity of the information.

In cryptography, cryptographic hashing functions are of fundamental importance. Hashing is a process whereby an algorithm (hash function) receives an input of data of any size and returns an output (hash) that contains a predictable and fixed size (or length).

(image: 'hash' is also known as 'hash sum')

Hacking made impossible due to 'HASH'

Regardless of the input size, the output will always present the same length. But if the input changes, the output will be completely different. However, if the input doesn’t change, the resulting hash will always be the same - no matter how many times you run the hash function.

Example: When you're logging into your Google account after a long time, considering that you have forgotten your password, you enter different passwords. Your account will open only when you have entered the correct password. These incorrect passwords that you enter is your 'input' and the action to your attempts ie your account not opening is 'output'. If your input is correct, then the output will be also correct - unchanged. The number of attempts is the number of times the hash function is ran.

The hash of each block is generated in relation to the hash of the previous block, and that's what creates a chain of linked blocks. The block hash is dependent on the data of that block, meaning that any change made to the data would require a change to the block hash and further, a change in the entire chain.

Therefore, the hash of each block is generated based on both the data contained within that block and the hash of the previous block. These hash identifiers play a major role in ensuring blockchain security and immutability.

If any of the records are subsequently changed, the computed hash will no longer match the original hash – and the change will be detected.

One of the reasons blockchain has become so popular is that its design prevents anyone from deleting or changing a record once it has been created.