An introduction to cryptocurrency, hashing, and the blockchain.
New topics and technology can be frustrating. When we as individuals struggle to understand a concept, it tends to deter future engagement, and turn us off. During these difficult times full of inflation, growing regulation, and general uncertainty, investing is a widely discussed topic. The hottest new investing option is cryptocurrency, whose main aim is to circumvent the centralized nature of banks and governments altogether.
While the premise of this technology is enticing due to the rapidly diminishing trust in our institutions, it still leads us to the same question:
What is cryptocurrency?
The currency you routinely use, historically, is dependent on the country you live in. In the United States we use the dollar, in Mexico they use the peso, etc. These currencies are termed “fiat” currencies. Cryptocurrency is a digital currency secured by cryptography. Cryptography is the study of secure communication techniques that allow only the sender and intended recipient of a message to view its contents. These techniques solve a number of real-world issues surrounding money. For example, cryptography prevents the use of counterfeit bills by using the blockchain. Blockchain is likely the most complex, yet foundational, aspect to understand when learning the basics of cryptocurrency.
Blockchain is the technology through which the cryptocurrency boom was born. The primary problems that have prevented digitized money from taking center stage were cybercrime, hackers, and attempts to double-spend. The blockchain solves every one of them through a process called hashing. A hash is a function that’s primary purpose is to convert one specific piece of information or value to another. This function works well in cryptography because it hides the information being transferred from one location to another. The hashing blockchain converts data of any size into data of a very specific size.
Let’s look at the following code:
If the above were placed into a hash it would be converted into 7 digits. In this case those 7 digits are:
Let’s look at this 3 digit code:
Once it was hashed, it would still return to a 7-digit output code:
Any change to the input prior to hashing, no matter how minor, will result in a drastically different 7 digit output.
All of these inputs and subsequent outputs are transactions that are anonymously collected and public on the blockchain. The reason that the blockchain is so revolutionary is not that it is impenetrable to hackers, but rather, that it is very sensitive to fraud, change, and tampering. The blockchain is named accordingly. Each “block” has its own 7 digit code , its content or transaction, and the 7 digit code of the previous block. Therefore, if any hackers change the code of block 1, altering it’s 7 digit code, it will be caught by block 2. The reason this occurrence will be caught by block 2 is that the code associated with block 1 will no longer match block 1’s new code. The discrepancy will prompt an adjustment to block 1’s code, returning it to its previous and untampered state. This sensitivity to change runs throughout the chain, ensuring any changes are dealt with swiftly to provide safety and stability to its users. Another aspect that adds safety to the blockchain is the fact there are copies of this same data also stored on other computers as well. So, even if your computer were hacked and the code was, by some borderline act of god, altered, the blockchain has to match its counterparts on other computers within the network. Meaning a hacker would literally have to hack your computer and a majority of the other users’ computers on the same platform in a specified amount of time to create a lasting change to the blockchain.
The blockchain technology is a revolutionary breakthrough that not only resolves the challenges of cybercrime, hackers, and double-spending but also operates as a springboard for potential international transactions.
As the above article demonstrates, understanding cryptocurrency is more than being able to list the cryptocurrencies out there. It’s about having a grasp on how they work underneath the surface, and perhaps the most important of those elements is the blockchain.