Let’s start with understanding the definition of cryptocurrencies.
Cryptocurrencies are digital or virtual currencies that are encrypted (secured) using cryptography. Cryptography refers to the use of encryption techniques to secure and verify the transfer of transactions. Bitcoin represents the first decentralized cryptocurrency, which is powered by a public ledger that records and validates all transactions chronologically, called the Blockchain. Although many cryptocurrencies have existed prior to Bitcoin, it’s creation marks an important milestone in the realm of digital currencies, due to its distributed and decentralized nature. The creation of Bitcoin precipitated the expansion of a lush and more diverse ecosystem of other coins and tokens, that are often regarded as cryptocurrencies in general, even when most of them do not fall under the definition of a “currency”.
What is a ‘Blockchain’
Originally developed as the accounting method for the virtual currency Bitcoin, blockchains – which use what’s known as distributed ledger technology (DLT) – are appearing in a variety of commercial applications today. Currently, the technology is primarily used to verify transactions, within digital currencies though it is possible to digitize, code and insert practically any document into the blockchain. Doing so creates an indelible record that cannot be changed; furthermore, the record’s authenticity can be verified by the entire community using the blockchain instead of a single centralized authority.
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BREAKING DOWN ‘Blockchain’
The blockchain was designed so these transactions are immutable, meaning they cannot be deleted. The blocks are added through cryptography, ensuring that they remain meddle-proof: The data can be distributed, but not copied. However, the ever-growing size of the blockchain is considered by some to be a problem, creating issues of storage and synchronization.
Blockchains and Bitcoin
Based on the Bitcoin protocol, the blockchain database is shared by all nodes participating in a system. Upon joining the network, each connected computer receives a copy of the blockchain, which has records, and stands as proof of, every transaction ever executed. It can thus provide insight about facts like how much value belonged a particular address at any point in the past. Blockchain.info provides access to the entire Bitcoin blockchain.
Extensions of Blockchains
Given the potential of this distributed ledger technology (DLT) to simplify current business operations, new models based on blockchain have already begun to replace the expensive and inefficient accounting and payment networks of the financial industry. Blockchain technology could free up billions of dollars: A recent Goldman Sachs report suggested that it could save stock market operators up to $6 billion a year.
While banks were initially hesitant to explore these technologies because of their concerns about potential fraud, they have started looking into how the blockchain might provide generous cost savings by allowing back-office settlement systems to process trades, transfers and other transactions much faster.
In fact, the first international blockchain transaction was completed on October 24, 2016. Brokered by the Commonwealth Bank of Australia and Wells Fargo & Co (WFC), the $35,000 deal involved Australian cotton trader Brighann Cotton Marketing, which purchased 88 bales cotton from its U.S. division in Texas and sent it to Qingdao, China.
Blockchains and Tech Companies
Among the startups leveraging blockchain technology for IOT devices is 21 Inc. The Silicon Valley-based startup received a total of $116 million in funding in 2015. According to the firm, the funding will be used to embed Bitcoin mining chips into connected IOT devices and cellphones.
BTCJam, a P2P lending platform headquartered in San Francisco, specializes in providing Bitcoin-based loans. Over the last year, the company has lent more than $15 million.
Storj is just one company that is currently beta-testing the concept of developing cloud storage based on a blockchain-powered network, with the goal of improving security while decreasing users’ dependency on a single storage provider’s centralized system. The company even offers users the opportunity to rent out storage capacity they do not need, similar to the way that property owners rent out extra rooms on Airbnb.
ProofofExistence one of the first non-financial companies to utilize blockchains, is a platform for executing contracts. It uses DLT to store encrypted information, thus enabling a transaction that cannot be replicated to be linked to a unique document.
Even established firms are interested. Microsoft Corporation (MSFT) has also expressed interest in blockchain technology, having recently formed a partnership with blockchain firm ConsenSys. In December 2015, Microsoft and ConsenSys announced Ethereum Blockchain as a Service (EBaaS) on Azure — Microsoft’s cloud computing platform — to provide a single-click, cloud-based environment to clients and developers. In June 2016, the two companies started developing an open source, blockchain-based identity system for people, products, apps and services.
Advantages of Blockchains
The widespread adoption of DLT will bring enormous cost savings in three areas, advocates say:
1. Electronic ledgers are much cheaper to maintain than traditional accounting systems; the employee headcount in back offices can be greatly reduced.
2. Nearly fully automated DLT systems result in far fewer errors and the elimination of repetitive confirmation steps.
3. Minimizing the processing delay also means less capital being held against the risks of pending transactions.
In addition, some smaller number of millions will be saved by shrinking the amount of capital that broker/dealers are required to put up to back unsettled, outstanding trades. Greater transparency and ease of auditing should lead to savings in anti-money laundering regulatory compliance costs, too.
Blockchain’s removal of almost all human involvement in processing is particularly beneficial in cross-border trades, which usually take much longer because of time-zone issues and the fact that all parties must confirm payment processing. Blockchain systems can set up smart contracts or payments triggered when certain conditions are met. The blockchain cotton transaction mentioned above, for example, used a smart contract that automatically made partial payments when the cotton shipment reached specific geographic milestones.
Financial Industry Blockchain Initiatives
In 2017, after three years of work, Goldman Sachs Group Inc. (NYSE: GS) received a patent for the SETLcoin, which would create near instantaneous trade settlement times (see Here’s How the SETLcoin Trade System Will Work).
In 2016, four major banks came together to develop the utility settlement coin (USC), a new digital currency whose use (mainly to buy securities) would be recorded via blockchain. Led by UBS Group AG (NYSE: UBS), they include Bank of New York Mellon Corporation (NYSE: BK), Deutsche Bank AG (NYSE: DB) and Banco Santander S.A. (NYSE: SAN), along with broker ICAP PLC (LON: IAP). In 2017, six more banks joined them: Barclays Bank, Credit Suisse Group AG (CS),Canadian Imperial Bank of Commerce, HSBC Holdings PLC (HSBC), MUFG and State Street Corp (NYSE: STT). The consortium is aiming for a 2018 commercial release.
However, for that to happen, a USC-based system or its competitor would need to obtain the approval of commercial institutions, central banks and regulators. And, although it is clearly almost there, blockchain technology is not quite ready for prime time.
Hurdles in Adopting Blockchain Technology
Problems that still need to be addressed include:
Security also remains a concern. Several central banks, including the Federal Reserve, the Bank of Canada and the Bank of England, have launched investigations into digital currencies. According to a February 2015 Bank of England research report: “Further research would also be required to devise a system which could utilize distributed ledger technology without compromising a central bank’s ability to control its currency and secure the system against systemic attack.”
Banks are not interested in an open-source model for identity. Both banks and regulators want to maintain close control. The development of a single digital identity passport authorizer is a critical next step.
Regulation is also critical in creating an open digital environment for commerce and financial transactions. Current physical certificates must be digitized to gain the full benefits of a fully electronic system. Other questions to be answered include: Who is responsible for maintaining and managing the blockchain? Who admits new participants to the blockchain? Who validates transactions? and who determines who sees which transactions?
Investing in Blockchains
Nevertheless, blockchain startups are not without challenges. Among the most significant is the fact that most consumers simply do not understand the extremely complicated concept of blockchain technology. In order to overcome this challenge, companies will need to find ways to precisely explain what they do in easily understandable language – and how they intend to deal with issues like secure online transactions and consumer privacy.
The Bottom Line
The potential applications for blockchain technology are almost without limit. At the moment, several of these applications are still either in the development stage or in beta testing. With more money being poured into blockchain-based startups, consumers should not be surprised to see DLT services and products becoming more mainstream in the near future.
Is blockchain technology the new internet?
By allowing digital information to be distributed but not copied, blockchain technology created the backbone of a new type of internet. Originally devised for the digital currency, Bitcoin, the tech community is now finding other potential uses for the technology.
Bitcoin has been called “digital gold,” and for a good reason. To date, the total value of the currency is close to $9 billion US. And blockchains can make other types of digital value. Like the internet (or your car), you don’t need to know how the blockchain works to use it. However, having a basic knowledge of this new technology shows why it’s considered revolutionary. So, we hope you enjoy this, what is Blockchain guide.
Coins vs Tokens: Categorization of Cryptocurrencies
The most common categorization of cryptocurrencies are:
Creating tokens is a much easier process as you do not have to modify the codes from a particular protocol or create a blockchain from scratch. All you have to do is follow a standard template on the blockchain – such as on the Ethereum or Waves platform – that allows you to create your own tokens. This functionality of creating your own tokens is made possible through the use of smart contracts; programmable computer codes that are self-executing and do not need any third-parties to operate. It really is super cool!
Understanding How a Cryptocurrency Wallet Works
Below we discuss how digital wallets work and give some advice on which wallets to use.
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How Does a Cryptocurrency Wallet Work?
Which Cryptocurrency Wallet Should I Use?
There are also universal wallets that can be used like HolyTransaction (one of if not the most popular).
There are also useful offline wallets like Nano Ledger S (these are good for long-term storage), go to our store tab and you should be able to get one, FREE worldwide shipping.
If you are new to cryptocurrency, then either:
Download the official (or officially endorsed) wallet from the official website.
Sign up for a service like coinbase(which handles a wallet and exchange with one account).
Or, Use a universal wallet like the one noted above.
If you know what you are doing there are actually a wide range of different wallets to choose from which offer varying pros and cons.
Which Cryptocurrency Wallet Should I Use?
IMPORTANT: Never share your wallet password or private key and never enter your password or private key anywhere (unless you are accessing your wallet via private key and password). To send coins and receive coins you only need to share your public wallet address (your “public key”).
Are Cryptocurrency Wallets Secure?
It’s smart to backup your wallet and private keys and to encrypt them. At least one backup should be on a CD or thumb drive to ensure that you have a “hard copy” laying around. If you lose your wallet or your keys then you lose the currency connected to it!
TIP: As a rule of thumb don’t keep more currency in your digital wallet then you would in your real one! You can learn more about securing digital wallets from bitcoin.org.
Are Bitcoin Wallets Anonymous?
Types of Wallets
Here is a quick breakdown of the different types of cryptocurrency wallets:
Desktop Wallet: The most common type of wallet. Typically an app that connects directly to a coin’s client.
Mobile Wallet: A wallet that is run from a smartphone app.
Online Wallet: An online wallet is literally a web-based wallet. You don’t download an app, but rather data is hosted on a real or virtual server. Some online wallets are hybrid wallets allowing encryption of private data before being sent to the online server.
Hardware Wallet: Dedicated hardware that is specifically built to hold cryptocurrency and keep it secure. This includes USB devices. These devices can go online to make transactions and get data and then can be taken offline for transportation and security.
Paper Wallet: You can actually print out a QR code for both a public and private key. This allows you to both spend and receive digital currency using a paper wallet. With this option, you can completely avoid storing digital data about your currency by using a paper wallet.
TIP: Watch out for browser extension malware if you are using online wallets, you may want to use a different browser for your online wallet than you do for your day-to-day internet browsing.
TIP: The term “hot wallet” describes a wallet connected to the internet. The term “cold wallet” describes a wallet not connected to the internet (for example a hardware wallet unplugged and in a safe.) When cryptocurrency is in “cold storage” that mean it is being held offline in a “cold wallet.” Funds you want to use like cash should be in hot wallets, funds you want to store long term are best held in “cold storage” in an offline wallet.
IMPORTANT: Remember that with any wallet, if you lose your private key, then you lose your money. That is true for paper wallets, hardware wallets, or any other wallet type. The reason you lose your keys doesn’t matter; there is no way to reclaim your cryptocurrency without them.
Most popular altcoins use the same fundamental building blocks as Bitcoin. This approach is relatively easy to carry out because Bitcoin is a free, open source platform. When an altcoin forks at the blockchain level, an alternate system of consensus rules must be used and the coin will have an entirely different distributed ledger. The same is true for altcoins built from scratch.
Some altcoins have different monetary policy rules built into the currency to encourage different uses and treatment. Policies such as minimum spend, or positive or negative interest on coins stored, can encourage or discourage hoarding. Policies for coin miningmay function differently from Bitcoin, as may the number of coins paid out per new block mined.
Some altcoins are made to discourage ASIC or GPU mining. This limitation is designed to reduce the advantage of specialized coin miners, as in the case of Litecoin, upon which half of all altcoins are based. An altcoin blockchain may also store different metadataabout the coin’s previous transactions or may allow the coin to be repurposed as an alternate asset.
While some altcoins can be attempts to enrich founders and offer little new, many have found niches because of way their differences encouraged new miners and uses. Since Bitcoin’s inception there have been upwards of 500 altcoins created. Litecoin, Dogecoin, Blackcoin, Freicoin, Peercoin, Vericoin, Myriad, NXT are just a few examples of altcoins.
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