Unlike those dependent on traditional financial instruments, cryptocurrency users don’t have to worry about their accounts getting hacked. This is one factor that has spurred on the appeal of Bitcoin, Ether, and others – but what makes them so secure against hacking or tampering.
Simple: it’s the blockchain. Blockchain technology forms the framework of these cryptocurrencies. This technology makes crypto virtually unhackable or used in unauthorized purchases and other transactions.
How does a blockchain work?
To understand how blockchain tech works, we need to take a closer look at the oldest crypto of all: Bitcoin.
In the Bitcoin setup, the system archives every transaction in blocks. One block is added to another to create a transactional chain (hence the name) that serves as a virtual account book listing all transactions made with Bitcoin.
Unlike traditional accounts or ledgers, however, everyone who owns the cryptocurrency plays an active role in keeping the integrity of the blockchain.
Why was blockchain created?
It is complicated to have an entirely digital currency that appears as lines of computer code that will have to be verified online every time you run a transaction.
Each line of code has a specific monetary value – but remember: a single code can be sent to multiple people. So how do you know that the value hasn’t already been spent?
Answering this question led to creating a unique digital payment system that depends on cryptography as opposed to the usual proofs of trust and enables two parties to transact with each other directly.
What actually happens during a crypto transaction?
In the Bitcoin scenario, each transaction is sent to all the user nodes in the system and each node puts them in a block. Afterwards, to prevent fraudulent transactions, the system’s proof of work and consensus functions kick in.
A majority system then comes into play. Here, 51% of all the nodes in the system need to approve the block in order to add it to the blockchain. The system goes with the longest chain, essentially the one with the most proof of work in it.
Bitcoin’s creators claim that it is technically impractical for anyone – particularly a fraudster or a hacker – to change the system if “honest” nodes control the majority of the chain’s processing power.
What else can you do with blockchain?
Given how effective and successful blockchain tech has been in the cryptocurrency sector, other industries wonder how it could be used.
Governments, in particular, are exploring the possibility of using it to facilitate voting (on-site or off-site) and to prevent the manipulation of election data, as well as for municipal and national records.
Indeed, the possible use of blockchain in healthcare and banking can eventually lead to lower incidences of financial fraud or falsified records and results. Moreover, as the experts put it, practically anything can be tracked and traded through blockchain, thus reducing operational costs as well as unnecessary risks.
