There is a high likelihood of you hearing the word Bitcoin or cryptocurrency in the news. You would likely have dismissed it as a gimmick. But it is not! The growth of Bitcoin in a matter of 10 years is such that even those who had earlier dismissed it are now looking to explore and invest in this field. This article will provide you with the necessary knowledge on Bitcoin and blockchain.
Problems With The Traditional Banking System
Cryptocurrencies and blockchain technology are parallel platforms where people are doing standard transactions. If a new system is replacing the existing system, it must be because of the issues the old system has. Here are the problems with the current banking system:
- High transaction fees
- Hacking and net frauds
- Financial crises and crisis in banking institutions
Blockchain is used to solve these issues, but how do they do it?
Blockchain Solves Issues Faced By Traditional Systems
Blockchain technology tackles and solves these issues through:
- Decentralized system: Banks are controlled by central agencies, and they become responsible for the rise and fall of the system. So financial organizations are controlled if there is one single entity holding power. Blockchain is decentralized, and hence no single entity has control.
- Public ledgers: These hold details of the transactions that happen on the Blockchain network and are accessible to all the participants. Though it is publicly accessible, the transactions are anonymous.
- Every transaction is verified: Complex hashing algorithm and encryption are done to eliminate the double-spending issues. Also, every transaction is verified by cross-checking the ledger.
- Low transaction fees: Blockchain has no or very low transaction fees. The transaction fee is less when you make a bitcoin to INR transaction or vice-versa. If you want the transaction to be done on high priority, additional transaction fees will be added to the user.
What are Bitcoin and Blockchain?
Bitcoin is a digital payment invented by a group of programmers or an unknown programmer called Satoshi Nakamoto. It can be used as a currency but doesn’t exist physically. Despite being virtual, they can be used like cash and transferred through the web. Bitcoin is based on a peer-to-peer network, and transactions happen without any intermediary.
A blockchain is a network that verifies the transactions and records in a public ledger. It is completely decentralized as there is no central repository administering them. Unlike normal currencies, Bitcoin cannot be created as and when needed. No fake coins can be circulated or created as complex mathematics, and encryption algorithms are used.
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How does the Blockchain of Bitcoin Work?
A blockchain is a type of database that is electronically stored. However, it is unlike databases. Databases have structured information that can be easily edited, filtered, and accessed. These are stored on servers that are built using many computers. That provides the power and storage for many users to use the database simultaneously. However, blockchain is different from a database.
The blockchain holds information in blocks, with each block having a specific storage capacity. This is chained to the previous block and forms a data chain. Millions of data-filled blocks are chained together. So every blockchain is complex and irreversible when used in a decentralized system. When a block is filled, it cannot be changed and becomes part of the timeline. The goal of the blockchain is to record information and make it distributed but not editable.
Features of Blockchain Technology
Some of the most important features of blockchain technology that make it a revolutionary one are:
- Public key cryptography
- SHA256 Hash function
- Peer to peer Network and distributed ledger
- Incentives for validation
- Proof of work
Bitcoin and blockchain have many promising use cases. They have attracted many big companies to buy bitcoin. But since it is a new technology, there are risks involved in investing in them. Do your research and determine whether to put your money or not.