Fundamentals of Blockchain in Cryptocurrency
Synopsis
- Introduction
- History of Bitcoin
- Genesis Block
- Mining Cryptocurrency
- Purchase of Cryptocurrency
- Blockchain Technology
- Blockchain and the Web
- Role of Key
- Hash Function
- Sample Transaction
- Conclusion
- Reference
Introduction
Bitcoin pioneered cryptocurrency and blockchain technology, which is a decentralised system that records transactions across a computer network. Other alternative coins, called "Altcoins," followed, using similar tech with tweaks for different purposes. Examples are Ethereum, Litecoin, Ripple, each with distinct features.
History of Bitcoin
Modern cryptocurrency is attributed to the anonymous figure known as Satoshi Nakamoto. In 2009, Satoshi Nakamoto published a white paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System" and mined the first block known as "Genesis Block". Since no Bitcoins had been made yet, this first block did not contain any existing Bitcoins. Instead, it included the "coinbase transaction," which created the first Bitcoins. Satoshi Nakamoto got fifty Bitcoins as the miner from this deal.
Genesis Block
All cryptocurrencies use blockchain technology which have a first block, called the "Genesis Block" and the whole blockchain network for that coin starts with this first block. For example, Bitcoin's first block was mined by Satoshi Nakamoto on the Bitcoin blockchain. In the same way, Litecoin's first block was mined by Charlie Lee on Litecoin blockchain. Although blockchain's underlying principle is the same, cryptocurrency protocols and features vary.
Mining Cryptocurrency
Miners are essential for blockchain authentication and recording transactions. An initial cryptocurrency supply comes from mining. After the first issuance, miners that validate and add new blocks to blockchain receive more coins for solving complex mathematical problems using computational power. This process is called as "Block Reward" mechanism which creates fresh bitcoin units.
For example, Bitcoin miners receive new Bitcoins for securing the network. It is important to note that they are not creating a new Bitcoin. Bitcoin mining happens every 10 minutes. Litecoin mining happens every 2.5-minutes. Each cryptocurrency has its own block time to meet its aims. And "Halving" halves the block incentive every four years to regulate bitcoin supply and is programmed to be a part of its monetary policy.
Purchase of Cryptocurrency
Buying - You exchange your regular currency (like USD, EUR) for any cryptocurrency on a cryptocurrency exchange.
Mining - Miners use computational power to solve complex math problems, earning newly created cryptocurrency as a reward, introducing them into the system.
Before making a purchase, attempt to learn more about various cryptocurrencies by reading their white papers, analysing their algorithms, participating in their discussion forums, and examining subjects such as technology, governance, and recognition.
Blockchain Technology
Blockchain technology is the underlying technology that powers cryptocurrencies, performing four critical functions namely,
Decentralisation - Blockchain lets cryptocurrencies run without a bank or government.
Security - It secures transactions and controls new units via cryptography.
Transparency - A public ledger records all transactions, ensuring transparency.
Immutability - Distributed ledgers maintained by a network of computers record transactions which are hard to change.
Security - It secures transactions and controls new units via cryptography.
Transparency - A public ledger records all transactions, ensuring transparency.
Immutability - Distributed ledgers maintained by a network of computers record transactions which are hard to change.
Blockchain and the Web
Web 2.0 relies on centralised servers. Mining secures the network and validates transactions by solving complex mathematical problems using computational power. Web 3.0, the internet's next development, distributes data and services over a network to eliminate single points of failure. Mining protects decentralised networks and verifies data in DApps (Decentralised Applications) or smart contracts in this paradigm. This trend towards decentralisation is consistent with the goals of blockchain technology, which seeks to create a more secure, transparent, and resilient digital environment.
Role of Key
In blockchain technology, a private key and a public key are cryptographic keys that work together to enable secure transactions. The recipient's public key determines where payments go while the transaction can only be authorised by the private key holder, assuring security and authenticity.
Private Key - A unique and secret code that is known only to the owner of the cryptocurrency wallet allowing to access and control the funds.
Public Key - A cryptographic address that can be freely shared with others to receive funds but it cannot be used to access or control the funds.
Hash Function
Hash function secures the information of the blockchain by linking all blocks together and providing a unique ID for each block's data. Any attempt to modify a block's data, they would require an immense amount of computational power which makes it very unlikely and protects the blockchain's stability.
Sample Transaction
Step 1 - A buys BITCOIN through exchange (or) A earns BITCOIN through Mining
*A buys or earns BITCOIN and initially owns it.
*This transaction is securely added to the blockchain as a block by creating a unique ID using a Hash function.
Step 2 - A sells BITCOIN to B
*A uses their private key to initiate the transaction and transfers ownership to B using B's public key.
*B is now the owner of BITCOIN.
*This transaction is securely added to the blockchain as a new block by creating a unique ID using a Hash function.
*Additionally, the block contains the unique ID of the previous block (where A initially got the BITCOIN).
Steps 3 - B sells BITCOIN to C
*B uses their private key to initiate the transaction and transfers ownership to C using C's public key.
*C is now the owner of BITCOIN.
*This transaction is securely added to the blockchain as a new block by creating a unique ID using a Hash function.
*This block also contains the unique ID of the previous block (where B bought the BITCOIN from A).
*Since, C is the final owner of BITCOIN, they can now access and control the funds associated with it using their private key.
Conclusion
The integration of cryptocurrency, blockchain technology, and robust transaction principles brings about a paradigm shift in our understanding and execution of financial transactions, presenting a decentralised, secure, and transparent path for the world of finance.
Reference
How do Cryptocurrency work?
How does Bitcoin Mining work?
How Bitcoin and Blockchain work?
What is Hashing on the Blockchain?
Thanks for reading my blog.
Nicely written! This gives a good introductory view to Blockchain. Many people would be interested in knowing more about mining. It would be great if you could write a separate blog on this and a few other topics too, like how this works in Web3.0, how is this different from Digital Currency, how to understand and differentiate between the various crypto currencies etc. Awesome content once again!
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