Link Between Blockchain and Cryptocurrency
When a new investor enters the world of cryptocurrency, they often use two terms mentioned together. These two terms are cryptocurrencies and blockchain. The two terms are used together so often that it gives many investors the idea that they both mean the same thing. This is particularly true if the investors are not tech-savvy. In this article, we will have a closer look to understand what the terms blockchain and cryptocurrency mean and how they are related to each other.
Blockchain is the Foundation for Cryptocurrency
It is common for investors to assume that blockchain and cryptocurrency are the same thing because both these terms became popular at the same time. However, the fact of the matter is that cryptocurrencies have only made blockchain popular. Blockchain technology has existed for a significant amount of time. However, it was not widely used. The blockchain is the very foundation on which cryptocurrencies are standing. If the blockchain ceases to exist, there would not be any cryptocurrencies. However, if cryptocurrencies cease to exist, blockchain technology could still be put to use in other sectors.
How Blockchain Works?
Blockchain is a way of digitally managing data in a decentralized format. The two keywords are digitally and decentralized. The working of a blockchain is described below:
- The term blockchain is derived from two words block and chain. This means that the system converts data into individual blocks and stores them in the form of a chain
- A single transaction can be considered to be a single block of data. When this data is stored in the blockchain, it generates a unique identification called the hash. Each block has three pieces of information viz. the data, the hash, and the hash of the previous transaction. Since each block contains data about its previous transaction, all the blocks are linked together forming a single chain. All the blocks in a blockchain end up creating an exhaustive record of all the transactions which have taken place.
- This means that when more transactions take place, the chain becomes longer. The longer the chain is, the more difficult it becomes to manipulate data. This is because as soon as data is manipulated, a new hash is generated. This new hash will be different from the old hash. Hence, the link will be broken and the system will be able to identify the manipulated data. This makes a blockchain-based system more secure than a traditional system.
- Also, data related to the blockchain is not stored in a centralized location. Instead, it is stored on a peer-to-peer network. This means that all participants have a copy of the data which is automatically validated before a new block of data is added. Hackers can take control of a single computer or network. However, it is almost impossible to gain control of all the computers which form part of a decentralized peer-to-peer network. Once again, this makes the network more secure.
Why Blockchain is the Foundation for Cryptocurrencies?
- The basic idea behind the formation of cryptocurrencies is that monetary power should be decentralized. Instead of power being centralized in the hands of central banks, it needs to be distributed amongst the masses. This is only possible because of the use of blockchain technology. Blockchain makes it possible to have a distributed ledger that is accessible to all parties at the same time. Without the use of blockchain, cryptocurrencies would just be digital currencies that are issued by a different agency. Since the power to regulate the currency would still be centralized, it would still be prone to manipulation.
- It is blockchain technology that makes it possible for every party to have a complete record of data at the same time. This makes the system completely transparent. Transparency is the crucial factor since transparency builds trust and it is this trust which makes any currency more popular amongst the masses.
- The security features of blockchain technology make the records reliable. In the absence of blockchain technology, anybody could simply hack the network and all the monetary value would be lost. Blockchain is the digital equivalent of a safety vault that banks used to provide in the 1800s. The fact that it is almost impossible to break into is amongst the primary reasons which make the cryptocurrency system stable.
- Blockchain technology is easily available to almost everyone in the world. Anyone with access to basic internet can use blockchain technology. It does not even require the use of high-speed internet. This also means that blockchain technology can be used to make payments across the globe without the regulations and transaction costs that are associated with regular fund transfers. Blockchain technology works just like an e-mail. Hence anyone who has access to e-mail can also utilize blockchain technology for fund transfers. Blockchain also ensures that transactions take place at a rapid speed. A certain time lag has been built into the network in order to enhance security. Apart from that, cryptocurrency transfers can be considered to be almost instantaneous.
To sum it up, blockchain and cryptocurrencies are two related but different concepts. Cryptocurrency is by far the biggest application of the blockchain concept. However, it is not the only application by any means. On the other hand, the success of cryptocurrencies has ensured that blockchain is shot to fame after existing for many years in digital obscurity.
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The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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