The overall market value of cryptocurrencies soared at the end of 2021 by approximately $1.5 trillion, to a valuation of $2.3 trillion. There’s massive investment potential – but also an inherent risk attached to the insanely volatile market. Investors have to battle with fluctuating prices, insanely high gas fees, and the risk that cryptocurrencies will fizzle out. Still, the blockchain technology powering it is revolutionary. Below, we’ll explore it in more detail and how it differs from traditional technology.
Blockchain Technology Explained
Blockchain technology can be complex because it rewrites everything we know about traditional technology. The technology governs everything in the network – from the formulation of new cryptocurrencies to moving away from traditional transaction authorizations like an ACH payment – and everything abides by the laws of a decentralized network.
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The concept of blockchain technology can be tricky to grasp. It essentially creates and governs the history of a digital asset – making it unalterable by using decentralization and cryptographic hashing. In order to achieve that, blockchain technology creates a database filled with blocks of data that form a chain in chronological order to create a single source of truth. All that happens using three essential concepts; blocks, nodes, and miners.
Blocks consist of the data, a 32-bit whole number called a nonce, and a 256-bit number wedded to the nonce called a hash. When a block forms, the nonce generates the crypto hash.
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Miners are responsible for creating the blocks through a process called mining. They use special software that solves incredibly complex mathematical problems to find a nonce that accepts the required hash.
Nodes are one of the most essential components that back blockchain technology decentralized – they spread control of the blocks to multiple sources. Every node will have a copy of the blockchain, and the entire network of nodes has to algorithmically approve new blocks before the chain can be updated and trusted.
That’s blockchain technology in a nutshell. Blocks are distributed amongst the network, and the best analogy that can help people understand is Google Docs. Rather than copying a Google Doc, access is distributed to a group of people – thus, creating a decentralized distribution chain that gives everyone access to the data at once.
Why Blockchain Technology Works So Well
Blockchain technology works so well because it’s based on transparency and multiple authorization points that create trust. It essentially does everything traditional centralized technology does, but without a single point of ownership. Naturally, you would think that might create distrust – especially in terms of transaction authorization. But, by creating code that’s distributed, rather than copied, to multiple nodes, there’s transparency and trust. A single discrepancy in the code means new crypto or transactions aren’t authorized.
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Plus, blockchain uses a type of encryption that secures the network. Cryptocurrency holders use private keys that verify ownership. Anyone working within the network to authorize transactions gets a reward. To be confirmed as a transaction and added to the blockchain, over 51% of the network must confirm its authorization. This process is called cryptography, a form of internet security.
Traditional authorization practices of any transaction are prone to hackers because there’s typically one point of authorization. For hackers to successfully steal from blockchain technology, they would have to infiltrate an entire network of nodes and rewrite the coding without anyone knowing – which is almost impossible to do.
The limitations to blockchain technology are minimal – many mainstream industries are adopting blockchain technology because it’s effective. Even traditional banking is exploring digital currencies using blockchain technology. As with anything, however, there are some limitations to consider.
One of the biggest hindrances is scalability, thanks to network issues. The overwhelming issue of authorizing transactions across a network of nodes is that the authorization depends on the congestion in the network. Crypto investors can incur massive network fees when converting and trading cryptocurrencies, especially within the Ethereum blockchain.
To put it into perspective, a centralized payment system like the automatic clearing house mentioned earlier can process thousands of transactions in a second. Whereas Bitcoin, for example, can only manage seven.
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Security – although transaction authorization is an entirely secure process – is another blockchain technology downfall. Everything in a blockchain network has an associated key, much like the private keys required to authorize a transaction. Digital wallet creation, for example, generates an associated key that provides access to all the stored data. Thus, there’s an associated security risk much like there is if your bank details end up in the wrong hands.
How The Technology Should Continue To Evolve
The future of blockchain technology is bright, even if some experts predict cryptocurrency could die out. Blockchain technology now supports and improves supply chains, introduces new digital currencies, helps with identity management, and creates smart contracts as a new way of securing business.
The technology proves that one entity doesn’t need the ultimate power over a network, finances, or business decisions. It saves time, cuts costs, and puts the decision-making abilities in the hands of a wider community.
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Blockchain technology is here to say. Attributed to the rise of Web 3.0 and the metaverse, we’re moving towards a decentralized era that gives power to the people. There is endless potential for blockchain technology – cryptocurrency is simply one part of the future of the technology.