How to Explain Blockchain and Cryptocurrencies in Simple Terms?
Cryptocurrency investments are popular today but to invest successfully, it is important to understand working principles of digital coins and their connection with blockchain. What are cryptocurrencies, how do they work and what do they have to do with blockchain? We are suggesting checking a simple explanation.
What is blockchain?
As blockchain is the base for cryptocurrencies’ creation, it is first necessary to understand what it is and how it works. So, blockchain is the technology of the distributed ledger. Distributed here means decentralized – the information is not kept by one person or stored on one computer – it exists on many computers connected to the network – nodes – at the same time.
To put it simply, blockchain is the list of blocks which are combined and connected together with the use of cryptographic methods. These records keep all the data.
The ledger is continuously expanding as new transactions turn to completed blocks and are added to previous records chronologically.
How does it function?
Blockchain has three fundamental components – 3 different technologies which are mixed together for it to work. They include:
• private key (secret key) cryptography;
• distributed network;
• means of servicing transactions.
So, first, everybody who takes part in transaction has two keys – public and private. When they are put together, the digital identity gets generated. It means that it is also possible to make a digital signature – this one is needed to make confirmations and control the transaction’s ownership.
Then, it combines with – this way interacting digitally for validation and confirmation of transactions is possible.
After the money transfer is done, the completed block gets distributed between all the nodes in the network which act as validators.
Validation is crucial as it solves the typical problem of digital money – double-spending. It ensures that crypto coins are not spent more than once at the certain point, so several transactions are not possible at the same time. For this reason, transactions history is recorded and can be easily checked and accessed.
Advantages of blockchain
Blockchain is highly use due to its important advantages and benefits it provides. So, decentralization has such pluses as:
1. There is no central authority
The data is stored in a distributed ledger, therefore, no one particular person has the control over the database. It leads to the next benefit.
2. High security
Again, as there is no single space for information to be stored at, it is almost impossible to hack the database or make any digital attacks. There is also almost no possibility to change the information.
3. Smart contracts
Blockchain stores a special software called smart contracts. They are the digital protocols which substitute the traditional contracts. Their main advantage is that they are self-executing – they are automatic and work only if all conditions are met.
More than that, they eliminate the mediatory from all processes as well. Also, other benefits that they enable are.
Among the other pluses of DLT there are – establishment of trust, cost efficiency, high speed of completing work, almost impossible system failure and elimination of fraud and corruption.
Where is it used?
Blockchain is utilized in many industries for improvement of different operations and working processes. For instance, among the innovative uses there are integrations into:
• medicine;
• transportation and logistics;
• agriculture;
• voting;
• real estate;
• insurance;
• sport;
• media.
However, originally, blockchain technology served as a base for creating cryptocurrencies – digital coins. In finance, it alters the standard ways of making transactions and the structure of the centralized banking system. So, let’s turn to cryptocurrencies.
What is cryptocurrency?
Cryptocurrency refers to the digital asset and is used as a method of payment like traditional money. Crypto coins are encrypted money which is transferred in a P2P way and gets confirmation in a public ledger through the process known as mining.
Digital coins work with no central authority control, therefore, there is no central bank involved and transactions are made directly between users.
Crypto coins’ blockchain basis makes all the transactions transparent, easily accessible and seen.
Where are digital coins stored?
Cryptocurrencies have a special place to be kept at – these places are crypto wallets. This kind of wallet is a software where coins get located with the storage of private and public keys.
So, coins are not stored directly in the wallet. Users use their keys for that and add transactions to the ledger with them. When the coins are received, in order to unlock them and start using, it is necessary that private key in the wallet gets matched with public address where crypto is assigned to. After the process is done, the balance on the wallet increases.
Crypto wallets can be of different types: software, hardware and paper. Among the software ones, users can choose between desktop, online or mobile ones. Hardware wallets provide the greatest level of protection and safety.
Where cryptocurrencies can be used?
Due to the little transaction time and low fees, cryptocurrencies can be used as payment methods for many different services and start getting accepted in a big number of companies.
Using the first and most popular cryptocurrency BTC, for instance, customers can not only pay for electronics or food, but can also download movies, games and music. Apart from that, it is also possible to travel, pay for medical treatment, make orders and get education using cryptocurrencies.
The blockchain technology and crypto coins will be discussed in more detail at the Blockchain & Bitcoin Conference Stockholm. Don’t miss an opportunity to meet the leading industry experts and learn more about the latest DLT trends and crypto developments!
