Blockchain technology has exploded into the public awareness with the rapid rise of cryptocurrency as a tradable commodity. Digital currency such as Bitcoin, Ethereum and Ripple utilize blockchain applications to create “coins” or “tokens” which are exchanged through a specific platform of networked computers. As business owners enter this space, many are wondering how does blockchain work? Cryptocurrencies are far too complex to explain completely, but here are the top three things businesses should be aware of regarding this trend:
- Cryptocurrencies are built on blockchain technology. Digital currency can be transferred from one account to another without a third party such as a bank. A block of encrypted information is entered into a digital ledger or database and then each additional transaction is added to that block forming a chain of transactions. What makes blockchain technology unique is that multiple copies of the information are distributed across a network of computers, thus decentralizing the data.
- Transactions are traceable and considered virtually secure. Each addition of transactional data is chronological and time-stamped, so it is difficult to edit or modify the data on all the distributed copies of the unidirectional blockchain. This is essential for digital currency or a bitcoin blockchain, since the network of independent computers verifies the chain of transactions so that a coin is unique and only spent once by an account holder. Owners store their currency in a virtual account called a blockchain wallet and spend coins by transferring them to other accounts.
- Although called cryptocurrencies, this is a misnomer as most do not function as actual currency. Traditional currency or money represents a specific unit of measure, a store of value and is a medium of exchange. Since digital currency is still new, few retailers accept coins for exchange of goods. A traditionally valued currency has a set denominator, for example 1/100th of a dollar is one cent, but cryptocurrencies don’t have a set limit and it is possible to own even 1/10,000 of a coin. Instead most investors are buying “coins” and holding them as their value fluctuates in an unregulated space hoping they continue to climb in value. Alternatively, you can purchase tokens which represent shares of a commodity or other asset. Token cryptocurrencies are built on existing blockchains with data blocks that can include smart contracts which specify what the allocation of each token represents.
Currently more than 1,300 cryptocurrencies exist. As more programmers utilize blockchain technology to encrypt and store data, more blockchain applications will become available to the public. Whether cryptocurrencies withstand the test of time, the technology they rely on has already opened up a brave new world of digital revolution and economic growth.