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The value of a currency is based on its stability and how it has stood the test of time, including how it has performed in various economic climates. A currency must be relatively stable and function as intended. The value of most currencies came initially from their innate properties. The issue of ascribing a currency with a specific value has always been tricky, even more so with the advent of fiat currencies because their value is not attached to a commodity.
Humans have used various commodities throughout history to conduct economic activity, ranging from agricultural products to precious metals. The use of coins as currency first started in Mesopotamia c. 625 BCE. Despite this early introduction to using coinage, our agrarian-based ancestors conducted most economic activity using the barter system. Physical goods, mainly agricultural products like cocoa and wheat, were exchanged for goods that couldn’t be made on the farm. Eventually, humans began replacing the barter system with precious metals. These metals were minted by the state (government) into a state-issued coin. Coinage was much easier to transport over great distances than other commodities.
Programmers created cryptocurrency to combat the issue of fluctuating currency values. Part of the value of a cryptocurrency comes from the idea that it has its specific purposes and functions. They all have problems they were designed to solve.
What is a Blockchain?
Simply put, a blockchain is a digital ledger that has the added benefit of being impossible to hack. It is a way to store enormous amounts of data because it contains all transactions. This list of transactions is duplicated and shared with all devices that make up the blockchain. There is no central source of information, and once a transaction happens, a record of it will be added to the ledger.
It uses cryptographic hash functions, and combined with its decentralized nature, any alteration to the information is impossible. Every block in the ledger and on all devices would have to be changed.
Three concepts you need to know to understand how the blockchain works fully.
- Blocks
- Nodes
- Miners
Blocks
The blockchain consists of small blocks chained together in chronological order, hence the term blockchain. Each block contains several transactions, and the blocks have three elements. These are the data contained in the block, the nonce, a 32-bit whole number, and the hash, a 256-bit number. When a new block is created in a chain, the nonce will generate a cryptographic hash. The block remains tied to the nonce and the generated hash unless it is mined, making it a signed block. According to Nick Sexton on an episode of The Crypto Show, “the concept of blockchain is to make a digital record that you cannot modify.”
Miners
Mining involves the addition of transactions to the chain by creating new blocks. Miners use special software for mining which is solving complex math problems to generate the accepted hash, usually referred to as the golden nonce. Every new block has a unique nonce and hash, but it must reference the hash from the block before it, which makes mining hard, especially on very long chains. Because a nonce is a 32-bit number and a hash is a 256-bit number, miners will have to go through about four billion possible combinations to find the right one. When someone gets it, their block will be added to the chain.
Nodes
The blockchain is decentralized, which is essential in terms of security. There is no central source that owns or controls the information on the ledger. It is distributed across multiple devices called nodes. They might be any kind of electronic device, and they maintain a copy of the blockchain. This decentralization keeps the network functioning securely because there is no single source of information.
Cryptocurrency
A cryptocurrency is a type of currency that only exists online and takes advantage of the security of the blockchain. It requires no physical exchange of money for transactions to occur, and all records of transactions are stored on the blockchain. Traditional banks or similar institutions do not back cryptocurrencies, and they keep any personal information private through encryption, regardless of the transaction.
Bitcoin Cryptocurrency
Bitcoin was the first cryptocurrency, and it remains the most valuable and popular cryptocurrency. It was created in 2008 by unknown authors under the name Satoshi Nakamoto, and its use began in 2009.
How Secure is Bitcoin
Bitcoin uses blockchain technology to alter any block in the chain. To successfully edit information on the blockchain, you would have to edit all the blocks that come before and after simultaneously on all the network nodes. Bitcoin is more secure than other financial systems, like Visa, because you have to trust the providers of those services. You depend on the centralized bank industry to back credit card transactions. The decentralized nature of bitcoin makes it impossible for any one person to interfere with transactions. What this means is all your bitcoin investments will remain very secure, and you can carry out your financial dealings without fear.
Blockchain technology is a way to store large amounts of data securely. In many ways, it is similar to a paper ledger where, as one page is filled, another is added. In a blockchain, more blocks are added as needed. However, blockchain cannot be altered or tampered with because each block is connected to those coming before and after. And unlike a paper ledger, a blockchain is not under the control of any individual or group. It is this decentralized and interconnected nature that makes it so secure.
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