If you have ever come across the word blockchain or cryptocurrency on the internet, you've stumbled across one of the most popular keywords in the last decade. There's a lot to learn in the blockchain ecosystem. That's why I am writing this article to answer nine of the most frequently asked questions about blockchain and cryptocurrency. Why don't we jump right into it?
How Does Blockchain Work?
We all know blockchain and cryptocurrencies are here to stay. There's been a huge debate over the years if blockchain is important. And every time, blockchain technology has proven that it is the best thing to happen in every sector. But how exactly does blockchain work?
A blockchain is a combination of three important concepts which are blocks, nodes, and miners.
Every chain consists of multiple blocks and each block has three basic elements which are the data in the block, a nonce which is randomly generated when a block is created, and a hash that is wedded to the nonce. When a block of a chain is created, a nonce generates a cryptographic hash. This data is signed and tied to the nonce unless it is mined.
Miners create new blocks on a chain through a process called mining. Every block has its unique nonce and hash but also references the hash of the previous block within the chain, so mining a block isn't easy, especially on large chains.
It is hard to change any data in a block. Why? That requires re-mining but not just the block with the change, but all of the blocks that come after. This is why it is very difficult to manipulate the blockchain. When a block is mined successfully, all the nodes on the network accept the change, and the miner is rewarded.
What Are The Benefits Of Blockchain Technology?
Blockchain technology has completely changed the financial industry. There's been a massive shift from traditional transactions to anonymous digital transactions. There are blockchain protocols that can complete transactions within split seconds.
There are a lot of benefits that come with blockchain technology. I will highlight a few of them that show why blockchain is being applied in numerous industries and sectors today.
Transparency: With blockchain technology, organizations do not need to keep separate databases. Since blockchain uses a distributed ledger, all participants in the network get access to the same information at the same time providing complete transparency. Transactions on the blockchain are recorded, time and date stamped. All participants in the network can be the history of the transaction thus eliminating any event for fraud or manipulation.
Automation: With the help of smart contracts, transactions can be automated. This increases the efficiency of any transaction. As long as the conditions for the agreement are met, a transaction is automatically triggered and completed. Smart contracts eliminate the need for a third party and thus reduce the amount of time spent to move files between both parties and the third party.
Security: Blockchain enhances the security of an organization by hiding personal data and preventing access to such data without permission. Since information is stored across a network of computers, it is quite difficult for hackers to get access to such data let alone view it.
What's the Difference Between Blockchain and Bitcoin?
A lot of people often think Bitcoin is the same thing as blockchain. However, there are different items. How?
Bitcoin is a digital currency used for online transactions. With Bitcoin, you can send or receive money anonymously without the need for a third party. Bitcoin is just an example of a cryptocurrency. All cryptocurrencies are powered by blockchain technology. These cryptocurrencies include the likes of Ethereum, Solana, EOS, Tron, BNB and so many more. These cryptocurrencies depend on blockchain's open peer-to-peer network and the stability of the blocks to record transactions and their history.
Although Bitcoin and other cryptocurrencies use blockchain technology, blockchain is more than just bitcoin. It goes far beyond just being used for financial transactions. With blockchain, you can execute smart contracts, maintain transparent records and strengthen the security of your private data.
How Secure Is Blockchain?
Because of its decentralized nature, blockchain technology is secured from data manipulation. There is no central body controlling the network and thus, manipulating the network is impossible. Any change made to the network is sent to all users in the network to make sure all records on the network are transparent. Since the data is seen and shared with all the users in the network, no data can be manipulated.
Imagine if you were asked to get information about an organization? The obvious method will be to get them from the central computer that holds all files. We see it in a lot of Hollywood movies. However, is it still possible to get such info when there is no central computer holding all files? What if not one computer but thousands of supercomputers was part of the big picture? Will it still be easy to get your hands on such data? The answer is No.
There is an exception though. This happens when at least 51% of the validators' power belongs to a single person. The person with such control can only alter his or her transaction in the recent block, perform double operations and censor the transaction made. However, the person in control can not forge other operations on the network or gain control over their funds. Such an attack, however, rarely happens. Do you need proof? How about the fact that there were only five 51% attacks in 2020 and three out of those five happened to one blockchain protocol. You're itching to know which one it is right? Don't worry, I've got you covered. Just keep reading 😉.
Blockchain technology is so secured compared to traditional systems where one who gains access to the central controlling body can easily access private data and even steal funds from the whole network.
What Benefits Does Blockchain Offer Over Other Security Tools?
Security in traditional systems is based on a trusted central body that stores and manages your private data and assets. Unlike traditional security systems, blockchain technology has no central body but enables its end users to get full control over their data and funds. Here are a few benefits that blockchain technology has over other security tools:
There is no central body that can be hacked.
All transactions are made transparent to the public thus making it hard to manipulate data.
Transactions are encrypted and accessible only to those who are part of the network. Changing any unit of data in the network affects all data in the entire network.
Transactions on the blockchain network have a trail that can be traced from its source to its destination. This can help to prevent fraud.
What Is A Smart Contract?
A smart contract is a code that is used by blockchain technology with a predefined set of inputs.
A Smart Contract is code that is deployed to the blockchain. Each smart contract contains code that can have a predefined set of inputs. Smart contracts can also store data. Following the distributed model of the blockchain, smart contracts run on every node in this technology, and each contract’s data is stored in every node. This data can be queried at any time. Smart Contracts can also call other smart contracts, enforce permissions, run workflow logic, perform calculations, etc. Smart contract code is executed within a transaction – so the data stored as a result of running the smart contract (i.e. the state) is part of the blockchain’s immutable ledger.
What are the Major Limitations of Blockchain Technology?
Blockchain with its robust resume still has its limitations. So what are these limitations and how do they affect the blockchain ecosystem? There are a few limitations to blockchain such as high energy consumption, complex systems, scalability, and the 51% attacks. I could go on to talk about some of these but I will focus on the 51% attack. Why?
Because over the years, blockchain technology is not as complex as it was. There are blockchain protocols today that do not consume energy when compared to the last five years. Scalability has been an issue for blockchain protocols that use the Proof-Of-Work framework such as Bitcoin and Ethereum. However, newer blockchain protocols such as EOS, Solana, and Polkadot have fixed the scalability issues with the EOS network able to complete transactions within split seconds.
The 51% Attack
The 51% attack is one obvious flaw in a blockchain's security. What is a 51% attack?
A 51% attack is an attack on the blockchain network where a person or an organization can gain control of 51% of the hash rate of that network. Such a person gains control of enough mining power to remove or modify data in the blockchain network and even prevent other miners from mining in the blockchain network. They can reverse transactions they made. This is known as double-spending.
There was an incident like this a few months ago. There was a 51% attack on Ethereum Classic in January 2021. Cryptocurrency exchange Coinbase detected a deep chain reorganization on the Ethereum Classic blockchain and immediately placed a pause on transactions on the ETC blockchain. The most interesting part? Ethereum Classic suffered a 51% attack three times in August 2020.
So, what strategies do attackers use?
One obvious strategy is to target smaller blockchain networks. A classic bully case, right?
It takes a lot of energy to mine. The performance of a miner depends on the amount of computing power they have. That is referred to as the hash power or hash rate. In a blockchain network, mining power is distributed across the different nodes in the network. So what happens when the hash rate is not distributed well enough? What happens when there is a huge drop in the hash rate? There is a possibility for a 51% attack.
Although owning 51% of the total hash rate of a blockchain can allow attackers to modify data on the blockchain network or double-spend cryptocurrencies worth millions of dollars, it is not that easy to initiate a 51% attack on a robust blockchain network. For a huge blockchain network like Bitcoin, it requires a lot of computer power to own 51% of the network.
According to Crypto51, it will cost $716,072 to perform a 51% attack on Bitcoin for an hour. For the same time range, it will cost an attacker $418,438 and $29,287 to perform a 51% attack on Ethereum and Litecoin respectively. For blockchain networks like Influxcoin, Zetacoin, or Mooncoin, it costs less than a dollar to perform a 51% attack on these blockchain networks within a 1-hour timeframe. One thing you should note is that one hour is not enough to mine enough blocks for a 51% attack to be profitable. For a successful 51% attack, it will have to continue for more than an hour and it won't be long enough before the developers of the blockchain network fix the problem or the price of such crypto falls which makes the attack less profitable.
This is one reason why targeting a big blockchain network is not possible or feasible. Once a blockchain grows, the possibility of a single entity or a group getting 51% control of the network is low. As the chain grows, it becomes more difficult to make a change to blocks that have been confirmed.
How can One Earn With Blockchain and Cryptocurrencies?
There are so many ways to earn from the blockchain industry. I will highlight four ways you can earn with blockchain and cryptocurrencies.
Staking: This is the process of locking up your funds in a Cryptocurrency and earning new cryptocurrencies in the form of interest. There are many cryptocurrencies you can stake and earn returns from them. Some of these include Tezos, DASH, Binance Coin (BNB), Tatcoin, HAG, and many more.
Buy and HODL: This is the most popular means of earning with cryptocurrencies. All you have to do is buy cryptocurrencies with long-term potential and hold them as their price increases over time. You can always sell off the profits you have gained as the price increases and still HODL for more profits. Another alternative is selling off when the price is high and buying when the price is low. You can increase the number of cryptocurrencies you HODL.
Investing: This is another way to earn with cryptocurrencies. You can invest early in cryptocurrencies and watch your investment grow. For example, as of July 2017, 1 BNB was sold at a low price of $0.1. Skip four years later and 1 BNB as at the time of writing this piece is trading at $661. That's a huge return on an initial investment. You can also buy shares into a new cryptocurrency if, after adequate research, you know it will appreciate over time.
Trading: Next to buying and HODLing is crypto trading.
Crypto trading involves buying and selling cryptocurrencies for a profit margin. Buying and HODLing are referred to as Spot trading. You can also trade cryptocurrencies daily and earn profits from them.
Where do I Learn About Blockchain and Cryptocurrency?
The internet is your ticket to learning about blockchain and cryptocurrencies. You can learn more from Binance Academy, Coinbase Learn, and Blockchain University. You can start with the basics of cryptocurrencies at Blockchain University and move on to learn how you can trade without losing your funds.
