2008 saw Bitcoin’s arrival into the world. It held the long-term promise to provide a brand new means of exchange that would eventually overtake fiat currencies alongside the traditional financial systems and services – courtesy of transparency, security, and privacy in its characteristics. That caught everybody’s attention. Another promise, however, was also there and it was not as widely noticed as the first one. It wasn’t even a promise but a fact.
The technology underlying Bitcoin’s system, which we know as “blockchain,” gave us a system in which two previously unknown parties could transact successfully with each other — without any recourse to mutual trust. This new way to do business was not that novel. Cryptography professors worldwide had been talking about this kind of system for ages, at the level of principles and possibilities. Yet nobody before Satoshi Nakamoto came up with a way to turn all that cryptographic potential into a practical thing that works in real life.
It’s true. You don’t have to trust the person who is buying a Bitcoin from you or vice versa. The record is there in the Bitcoin ledger for all to see. And the ledger has a full copy of itself in every node in the network, so you’re safe.
There is the next question, of course. So yes, you don’t need to trust the other guy. You just need to trust the system, and everything will be ok. But can you trust the system? What if it’s hacked? What if it’s unfair? In this article, we will endeavor to explain why the system is fair; it can’t be rigged, and, most importantly, it is practically impossible to be hacked so that you know for sure that the answer is: yes, you can indeed trust the system.
Keep in mind that the information we present here to you applies to every extant blockchain. Bitcoin was the first one, and it’s still the one that gets most of the world’s attention. But the technology that supports the BTC environment can now be found in many other networks such as Tron or Ethereum to name a couple. Because they share the same basic informational principles as Bitcoin, all these different networks are also safe, provided that they are large enough and are genuine blockchains.
It’s been 13 years since 2008. We’ve been through a significant world financial catastrophe and a global pandemic since then. Everything has changed, and the financial world is no exception. There are plenty of investors who are pouring resources into Bitcoin and other cryptocurrencies in a myriad different ways. The best-known one is pair-trading, which is the same thing as its older, more established cousin of Forex. But there’s nothing to stop investors from using it to buy items such as a super luxury car of limited edition which will be more valuable next year.
While cryptocurrencies have had limited success so far as the world’s new money, the blockchain technology that enables its existence has grown very popular at the industrial level because many industries have seen its potential to solve some common problems. (More and more businesses keep getting attracted to this technology, let alone individuals.)
So what is a blockchain, anyway?
We’re glad you asked. The most common blockchain type consists of a digital database that keeps records of some data critical to a given process. In Bitcoin, for instance, that database is called “the ledger,” and it tells you who has how many Bitcoins right now as well as whom has transacted with whom.
The network’s complete history is kept right there for everyone to see. The critical thing in a blockchain is that the database’s information can’t be manipulated or altered. It’s sacred, if you will. That’s the feature. That’s why many institutions, mainly financial, governmental ones, are so interested in adopting it.
The way a blockchain keeps its data is also different from other paradigms you may already know. It is split into many pieces, known as blocks. Every block has a given size, an amount of information they’re supposed to hold. Once one block gets filled with data, the network creates a brand new block, appends it to the previous block, and uses the new space to keep writing data. So, the database is a chain of blocks that grows in time. Hence the name of blockchain.
So any bit of new information produced by the network’s activity goes into the last, newest block and only there. This new block is attached at the end of the chain, so the timeline in the database is obvious and irreversible. This is complex, but that makes decentralization possible because every node has a full exact copy of the whole blockchain, so every actor in the network has the same information.
Completed blocks are not at the chain’s end anymore, but they are “inside” and, as such, they are untouchable (remember, new information can only be written in the newest block, the last one). You can tell which is which because the network assigns a timestamp to every block, so you know exactly which comes before or after.
Also, a cryptographic mathematical algorithm calculates hash codes. That is how the network knows that the cherished information inside the blocks is kept safe and unchanged because if something goes wrong and the “untouchable” bits change, then the whole hash changes as well.
Is blockchain secure?
This is the big question. Scandals have hit the crypto-sphere at times, and when they do, the mainstream media always makes a big song and dances about it. It’s normal; scandal sells.
But before you sell all your digital assets out of fear of hackers, stop for a moment and ask yourself this question: was the hack in the news a problem of the security in the blockchain itself, or was it a hack in the centralized, traditional user systems that the exchanges use to manage their user pool?
You need to remember that websites that deal in Bitcoin have been hacked for sure. But Bitcoin itself has never had a security breach of any kind. Not once.
Let’s take the 2019 Coinbase incident as an example. A smart guy found a way to control a large enough piece of Coinbase’s blockchain, thus carrying out a successful attack. The said attack consisted of rewriting transaction histories, thus hitting at the very heart of the network’s security. The newly written transaction histories allowed for “double spending,” which means the assets could be used twice to buy whatever the hacker wanted.