Unless you’ve been hiding under a rock for the last 6 months, chances are you’ve heard of cryptocurrency, Bitcoin and blockchain – but you may not know the inner workings of each or how they are connected. Here’s your guide to understanding the basics and the first in a series designed to make understanding the inner workings of blockchain easy and accessible.
In a nutshell, Bitcoin is a type of cryptocurrency or digital asset which is built on a technology called blockchain. Blockchain is a distributed ledger or record of transactions that is visible across a network (node), giving all participants on the network the ability to see and verify the transaction. It is also important to note that, because of the nature of cryptocurrency, once a transaction is completed, there’s no going back – in other words, it’s unmodifiable (also referred to as immutable).
Going Deeper… Bitcoin Origins
Bitcoin was first created by Satoshi Nakamoto – a mysterious figure whose real identity has never been confirmed. In 2008, Satoshi wrote a whitepaper where he (or she) described a new type of peer-to-peer digital form of payment called Bitcoin which could bypass traditional financial institutions and was both transparent as well as immutable (meaning transactions once verified could never be reversed). Bitcoin is generated through complex math computations that take an enormous amount of resources and are powered by “miners”, who then get rewarded in Bitcoin for solving those complex computational problems. It’s meant to be a store of value like gold and like gold, Bitcoin is limited in its supply of only 21 million Bitcoin that will ever be in circulation. This is one of the main reasons contributing to its meteoric rise in value. Just one year ago in March, 2017 it was hovering at around $1100 USD per Bitcoin and today it’s almost 10x that value, as of this writing $10,868 USD (but not without its fair share of volatility).
The benefits of this new currency are numerous:
- Decentralization – A reason why transactions are not modifiable is due to the many participants bearing witness to the transaction.
- Security – The transparency of the transaction to multiple parties and the fact that it is encrypted makes cryptocurrencies a very secure asset class.
- Fast and low cost – Since cryptocurrencies are not tied to business markets, you can make transactions at any time of day or night, and usually much faster than with a standard wire service. Also, transactional costs are much lower than what you would be normally charged by a financial institution.
Blockchain Assembly Line
Blockchain is the underlying technology platform that makes all cryptocurrencies possible. Blockchain is designed to be a trustless system, meaning you don’t need to trust the parties involved, as the system itself creates trust through decentralization and transparency.
Transactions are validated via algorithms, very complex mathematical equations that take a ton of computing power to complete. The miner who has solved the equation is then verified across their node and a new block is then added. This system is called “Proof of Work”. An easy way to imagine blockchain is an assembly line where each participant adds a new component to the widget and down the line it goes, except for with blockchain, that block could go on verifying hundreds of transactions up to a maximum of 1,000,000 bytes of data.
Advances in Blockchain
You can think of Bitcoin as a first generation application built on blockchain technology. In July of 2015, a new blockchain platform called Ethereum was developed by Vitalik Buterin. The key difference being, that with Ethereum, developers are able to build and launch smart contracts on its platform, with cryptocurrencies being just one of its applications. Smart contracts eliminate the need for the middlemen (like brokers) because of the open, transparent and verifiable nature of blockchain technology. The innovation of the smart contract is that it can be used for any type of digital agreement, the potential is vast and examples include electronic voting, monitoring a supply chain, securing
digital rights to artwork and music, ensuring the origins of a product at the source, recording property assets digitally, renting an apartment, tracking and storing health records privately, and so much more.
Ethereum revolutionized blockchain and opened up the market to many more companies that are now building their own smart contracts on the platform. The fact that so many companies are building their own applications off the Ethereum blockchain and using Ether (or ETH, Ethereum’s cryptocurrency) for payments has contributed to the price of Ether going from $17 to $744 in just one year, where it is today.
So Many Cryptocurrencies, So Little Time
Today there are over 1500 cryptocurrencies in circulation. Many of these from ICOs (Initial Coin Offerings) that launched last year, many potentially fraudulent, many building serious and amazing new technologies. If you want to get into buying cryptocurrency, the easiest place to start is Coinbase, which is a mobile app you can connect to your bank account and purchase the four available coins they currently have listed on their exchange: Bitcoin, Bitcoin Cash, Ethereum and LiteCoin.
Other exchanges will provide access to more altcoins (alternative coins) such as EOS, Ripple (XRP), Monero (XMR), Stellar (XLM) and so many more. I’ll be going into more detail about these altcoins and their businesses in a later post. Another thing to note when buying from an exchange is you will likely have to use Bitcoin or Ether to purchase any other altcoins. Also, security is super important, so you’ll want to store your coins in a digital wallet.
The market for cryptocurrencies shows no signs of letting up as noted by my good friend and crypto influencer Stewart Rogers, Analyst-at-large at VentureBeat
We’ll see more ICOs than ever before this year, and there will be little to no reduction in the average funding amount. Blockchain technology founders will push into niche industries and marketplaces in order to own the top solution spot across a large number of categories, rather than trying to disrupt large-scale marketplaces.
Stewart Rogers, Analyst-at-large at VentureBeat
Like with any investment you make, it’s important to do your homework!! You’ll want to dig into these companies and understand their underlying business models. If they recently launched an ICO then they should have a whitepaper with details on their business and roadmap. Looking at this, plus their advisors will shed some light on whether the business is viable. Remember that these are early stage companies and like most startups, many will fail and if you buy altcoins, you are essentially becoming an early stage investor.
This tweet from Alexia Bonatsos, former editor of TechCrunch and now Investor at Large perhaps states it best, new wealth creation is happening and it’s important we educate ourselves and jump on board!
A New Decentralized World!
Beyond just an investment opportunity, blockchain is truly a revolutionary new technology that will change and disrupt almost every industry we know. Why? Because it flips the power structure, no longer are structures of control dictated from the top down, with a select few setting the mandates, blockchain democratizes that structure and gives the power back to all of us.
I asked some influential heavy hitter crypto women about their thoughts on the space, here’s what they say the future holds for blockchain and why it’s so important!
Our world has enormous challenges, from poverty, to climate change, failing health care systems and killer diseases. Investing in blockchain technology as an instrument of social change will be the most effective solution, that’s the future I expect. It is a paradigm that empowers entrepreneurs and fuels technologies, not for the world that we live in today, but for one that enables a better tomorrow.
Bárbara Minuzzi, Founder Ausum.VC
Blockchain is a way to decentralize infrastructure. In a world where centralized patriarchy has dominated, this opportunity can create a huge shift in power and make room for women leaders to step up, building new forms of governance.
Yasmeen Drummond, Women in Blockchain, Team Block Society
If ever there was a time to connect transparently the world, the time is now through blockchain that we can achieve true democratization for economic liberation and equality.
Elise Moussa, Founder & CEO, Snapay
The world of blockchain and crypto is an endless rabbit hole and one I will continue to research and break down for my #LatinaGeeks, as there’s so much more to share! Hope you enjoyed this post, please let me know your thoughts or anything you’d like me to explore further!