Blockchain technology happens to be one of the most disruptive technologies that have completely revolutionized the way the world does business. A novel concept that promises security through a decentralized peer-to-peer network and cryptography as well as lower transaction costs by eliminating the middleman is what the world has been waiting for.
Blockchain has gained popularity remarkably fast with a projected worth of $400 billion at a compounded growth of 82.4% in the next eight years from 2020. While most of this growth can be attributed to the introduction of digital currencies, there is more to be discovered beyond the basics of Blockchain.
Still, the best way to get familiar with this disruptive technology is by first learning its terminologies.
Satoshi Nakamoto refers to a pseudonym (individual or group of people) who were the anonymous inventors of the first cryptocurrency, Bitcoin. Bitcoin white paper was published in 2008 and describes the decentralized nature and peer-to-peer management of the Bitcoin protocol.
Satoshi is also used to refer to a fraction of bitcoin that is equal to .0001 Bitcoins.
This is simply a digital currency that is secured by cryptography making it next to impossible to double spend. Cryptographic algorithms are employed to regulate the creation of cryptocurrency units and verify transactions. Cryptocurrencies are not regulated by central governments and monitored by distributed ledger technology known as the blockchain.
3. Bitcoin (BTC)
The world’s first cryptocurrency was created in the year 2009 by Satoshi Nakamoto. Bitcoin is supported by the proof-of-work blockchain and is abbreviated BTC.
Altcoin refers to any other digital currency that is not bitcoin. Most altcoins were founded on the success of bitcoin and so have several similarities to Bitcoin yet with some unique characteristics that make them slightly different from Bitcoin. Ethereum and Litecoin are two examples of popular altcoins.
Fiat is a term used to refer to currencies issued by governments such as the U.S dollar, European Euro, Japanese Yen, and British Pound.
Blockchain is a digital ledger that is continuously getting updated with all the verified transactions done with a particular cryptocurrency. These transactions are organized into blocks that are linked to each other with a cryptographic signature to form a chain. Records in the blockchain are immutable.
Blocks are units that link together to form a blockchain. Each block consists of a certain number of verified records of the transactions that have been undertaken with a cryptocurrency. Each block contains recent transactions in reference to the block that precedes it. Once a specified maximum number of records have been added to a block, it is completed and added to the last block in the chain allowing for records to be entered in a new block.
This is the process by which a cluster of nodes in a peer-to-peer network agree on the rules, values, and states of valid transactions. In blockchain, all participants in a network verify transactions using various consensus mechanisms. Some well-known consensus mechanisms include Proof of Work (PoW) and Proof of Stake (PoS).
9. Block Height
The number of blocks in a blockchain. The height of a particular block can thus be determined by the number of blocks that precede it while height 0 refers to the initial (genesis) block in a chain.
A cryptocurrency wallet serves similar purposes as physical wallets, it allows users to store and manage their digital coins. A wallet contains addresses, keys, and seeds to be able to function properly. There are different types of wallets including:
- Hot wallets: These are web-based wallets and are easily accessible but also susceptible to hacking. However, they provide an easy way to spend and trade cryptos and manage transactions.
- Cold wallets: Wallets that offer offline storage for cryptocurrency. They are more secure yet not easy to trade compared to hot wallets.
- Hardware wallets: Store private keys in a physical device such as a USB stick or smart card.
- Software wallets. An application installed on the computer or mobile phone from which one manages cryptocurrencies and maintains full control of their private keys. Hence software wallets can be desktop wallets or mobile wallets.
A string of unique numerical and alphabetical characters or a scannable QR code from where cryptocurrency is stored, sent, and received in a blockchain network. An address functions more like an email account or a phone number.
The process by which new transactions are verified on a blockchain network. Miners often use a proof of work (PoW) consensus mechanism where they solve complex cryptographic equations to verify transactions and successfully add them to the blockchain. For this, miners are rewarded with new cryptos.
13. Block rewards
Block rewards are rewards given to the first miner who successfully verifies and add a block to the blockchain. Block rewards are in the form of a new cryptocurrency and transaction fees. For instance, as of 2021 Bitcoin miners earn 6.25 bitcoins for every hashed block. However, after the maximum supply of 21 million bitcoins has been attained, miners will earn from transaction fees.
Most cryptocurrencies have a determined maximum supply. For BTC, the maximum supply is 21 million bitcoins making Bitcoin a scarce and high-value digital asset. The incentive awarded for mining blocks reduces by half every four years in what is known as halving. Initially, miners earned 50 bitcoin for every block that was validated and added to the chain. Bitcoin has undergone halving thrice in 2012, 2016, and 2020 with its current reward at 6.25 bitcoin. The final halving will take place in 2140 after the maximum bitcoin supply has been attained.
A hash, also referred to as a hash value, is a fixed-size bit string of characters delivered as output to represent an original data file of arbitrary length. A hashing function calculates and converts the data file into a hash value. Each block in a blockchain should have a hash value that verified the transaction preceding it as well as its own hash value.
16. dApps (decentralized app)
dApps are open-source applications that run on peer-to-peer networks like blockchain. dApps networks are secured with cryptographic tokens. dApps have several common features.
- They are decentralized
- They run on the blockchain (distributed networks) technology
- Transactions are executed with smart contracts
- They incentivize participants with dApp tokens
Fork refers to a situation where a single cryptocurrency or blockchain network is split into two independent projects with a common history. This happens when the community initiates changes in the code, principles, and governing rules of the network protocol.
There are two kinds of forks:
- A soft fork creates a new blockchain when the protocol is updated to a newer version. When a soft fork occurs, only the blockchain that is compatible with the new protocol remains operational.
- A hard fork initiates a radical change in the blockchain protocol that results in two independent projects running separately. One project follows the previous protocol while the other follows the new protocol version.
1 .ICO (Initial Coin Offering)
Similar to IPO (initial public offering) ICO is a technique through which startups raise capital by selling tokens in advance to launch a new cryptocurrency.
2 .Double spend
This refers to a situation within the bitcoin network where an individual will attempt to send a single Bitcoin transaction to two recipients at the same time. However, once one of the transactions goes through a confirmation process, it is nearly impossible for the other one to go through the same.
3 .ASIC (Application Specific Integrated Circuit)
An Application-Specific Integrated Circuit (ASIC) is an integrated circuit chip that has been designed for a specific purpose. Cryptocurrency mining ASICs perform complex calculations that find hashes and verify blocks in a blockchain.
Blockchain technology will continue to gain importance across the world’s industries as it provides a platform for storing and transmitting information fast, securely, transparently, and cost-effectively. Today it is not only financial institutions that are shifting to blockchain but also government agencies, insurance, healthcare, retail, and supply chain institutions among others. Its compatibility with other technologies like the internet of things makes it all the more important.