Entry {1} - {Crytpocurrencies and the Blockchain}

Cryptocurrencies and the Blockchain

Preface

     For the first blog post, I generally explore my topic and its main components. 

Introduction

      In 2009, an unknown figure who goes by Satoshi Nakamoto invented a decentralized digital asset called Bitcoin. Designed to be used as a globally available, peer-to-peer electronic currency, Bitcoin is independent of any central authority or government (decentralized). Originally worth $0.0008 U.S. dollars per unit on its debut date of October 5, 2009, Bitcoin just recently surpassed a colossal $6,000.00 per unit. In the years after the creation of Bitcoin, many other currencies modeled after Bitcoin's design were constructed. Bitcoin and these other "alt-coins" (digital assets that are not Bitcoin) are classified as cryptocurrencies, which are defined as "digital or virtual [currencies] that use cryptography for security," (1).

     Hundreds of cryptocurrencies exist today, and each of these coins has a value. Some currencies, like Bitcoin, have a finite number of units, whereas other coins like Ripple (a cryptocurrency designed to be used as an exchange platform for currencies for international bank-to-bank transfers and money wires) have an unlimited value. Because of these conditions, the value of a cryptocurrency fluctuates depending on the freqeuncy at which the coin is being used by the public and/or how quickly people are buying or selling the coin in relation to how quickly new coins of its kind are being created.

     Cryptocurrencies have many applications (to be discussed), but their main function is to serve as a means of transaction on the blockchain, which is "a digitized, decentralized, public ledger of all cryptocurrency transactions," (2). Blockchain technology removes the need for third parties in financial transactions because of its proof-of-work concept. Essentially, computing power is used to verify transactions of a respective cryptocurrency by nodes (all computers connected to the network) recording and relaying the same data of a transaction to the blockchain. Each block represents a certain chronological time frame. Once the space of the block has been filled, the block is then added to the latest block in the chain, repeating infinitely.

     To ensure that each transaction and use of a cryptocurrency is accurate and trustworthy, each coin was engineered to utilize cryptography, "a method of storing and transmitting data in a particular form so that only those for whom it is intended can read and process it," (3), to allow for reliable proof-of work evidence when processing transactions to the blockchain. Without heavy cryptic layers protecting the holders of cryptocurrencies, skilled hackers would easily be able to virtually steal the assets from unfortunate parties.

     Both blockchain technology and the use of cryptocurrencies are a very new concept in the realm of technology. Large companies like Google and IBM have explored blockchain technology because of its logistical efficiency and potential to cut infrastructure costs. In addition, teams have been developed at financial institutions like Goldman Sachs to trade and utilize various cryptocurrencies for wealth opportunities. The field is hardly explored, and more applications of this technology are being created every day.

Relation to Computer Science

Computing Power and the Solving of Algorithms

     Cryptocurrencies and blockchain technology would not exist without computer science. Everything from the design of the cryptocurrency and its function on the blockchain to the blockchain itself and how it can be applied to the real world, components of computer science are present in every step of the process. For example, to create new coins, computing power is used to "mine" new coins for issuance. Mining is "the process by which transactions are verified and added to the public ledger, known as the blockchain, and also the means through which new [cryptocurrencies] are released," (4). The computing power is used to answer increasingly complex mathematical formulas. This process is the proof-of-work concept referenced earlier that maintains the blockchain's legitimacy. Miners from across the globe use their computers to run algorithms in the hopes of playing a role in verifying the transactions of a cryptocurrency, for they are rewarded for their time and power in a specific quantity of that cryptocurrency.

Cryptography

     In addition, the prefix of the world "cryptocurrency" hints at another huge field of computer science that cryptocurrencies and the blockchain use to exist: cryptography. Cryptocurrencies are stored in online wallets, which are composed of two identification forms or keys: a public key and a private key. The public key acts as an address for the wallet, and anyone can see it. If one party wants to send a certain volume of a cryptocurrency to another party, it will tell its wallet to send the allotment to the other party's public key. This transaction is then verified on the blockchain. The private key, on the other hand, acts as a user's password to his or her wallet. The private key uses 256-bit encryption for extreme security. A bit, short for binary digit, is "the smallest unit of data in a computer. A bit has a single binary value, either 0 or 1," (5). Binary is the heart of how computers operate, and it's seen here in a common component of cryptocurrencies.

Programming

     Another component of computer science applicable to cryptocurrencies is the programming of code. Bitcoin and its complete design was created with the programming language C++. Cryptocurrencies are not tangible objects, which means they must have a set of instructions that dictate their electronic existence and how they can operate. Programming allows this to occur, and Satoshi Nakamoto chose C++ to create the first cryptocurrency incorporated through blockchain technology.

Infographic

     This infographic serves as a helpful guide to follow through the steps of blockchain technology through cryptocurrencies as well as potential future applications of the technology.
(6)















References


  1. Cryptocurrency. (2017, September 01). Retrieved October 23, 2017, from http://www.investopedia.com/terms/c/cryptocurrency.asp
  2. Blockchain. (2017, September 18). Retrieved October 23, 2017, from http://www.investopedia.com/terms/b/blockchain.asp
  3. Rouse, M. (n.d.). What is cryptography? - Definition from WhatIs.com. Retrieved October 23, 2017, from http://searchsoftwarequality.techtarget.com/definition/cryptography
  4. Bitcoin Mining. (2016, December 02). Retrieved October 23, 2017, from http://www.investopedia.com/terms/b/bitcoin-mining.asp
  5. Fouse, M. (n.d.). What is bit (binary digit)? - Definition from WhatIs.com. Retrieved October 24, 2017, from http://whatis.techtarget.com/definition/bit-binary-digit
  6. Making sense of bitcoin, cryptocurrency, and blockchain. (2016, February). Retrieved October 23, 2017, from https://www.pwc.com/us/en/financial-services/fintech/bitcoin-blockchain-cryptocurrency.html

Comments

  1. VadKuflOctober 24, 2017 at 6:14 PM

    That's a very good first post, and a beneficial read for those not yet initiated.

    With this intro, you set up a flexible topic with which you could go in all kinds of directions. The blockchain in and of itself is versatile and it would be fun to ponder on its interdisciplinary applications (banking, retirement, medical, etc); contrastingly, you could also go on the route analyzing cryptocurrency's validity as either an investment opportunity, a legal security, a feasible decentralized (or fatally flawed) concept, or a number of other analyses. The topic is really interesting, so I'm glad you picked it.

    Whichever way you go, I can't wait to read more from you. Best of luck

    ReplyDelete

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