The use of cryptocurrency is rapidly growing worldwide, with the cost of Bitcoin continuing to increase, and its foundation is based on blockchain technology. In traditional financial systems, currency is controlled by the government, or state, through various institutions, including banks. Using this system, they keep track of the distribution of currency in a centralised ledger. Blockchain technology eliminates this centralization by operating through a network of nodes, or computers. This allows the ledger to be managed by the collaboration of these nodes, each of which has a downloaded copy of the entire chain that is constantly being updated. Whenever data is moved, all links checks to ensure that it is authorized, stopping fraudulent activity in its tracks. Any transaction that is taking place needs to be approved by all nodes, before it will be added to the chain.
The fundamental purpose of blockchains is to distribute their ledgers across a decentralized network of nodes, replacing the need for a centralized third party to verify transactions. This method enables thousands of copies of the ledger to be stored, across all the nodes, ensuring that a single point cannot be targeted by hackers. In addition, it makes it possible for anybody with a computer, and internet access, to become a part of the ledger’s maintenance.
Blockchain technology is also used to create new cryptocurrency. The nodes on the network group the most recent transactions together, packaging this data into a block which is then added to the current chain. The entire network receives this broadcast, adding it to the information already stored in the node. This process of confirming a transaction is referred to as ‘mining.’ The operation of nodes is an expensive process, and two incentives are given to those that run one on the network. The first miner to solve the cryptographic puzzle necessary to parcel together the most current block receives a reward, as well as a fee, paid by the sender, from each transaction it bundles into a block.
By decentralizing currency, blockchain technology and ‘mining’ gives a chain of people the power to introduce new money into the economy. It also presents the opportunity for them to manage the currency currently controlled by the banks, and other appointed systems. ‘Mining’ is crucial in determining that there is value to the new currency being introduced, because of the costs associated with the running of the nodes. This idea of money being stored outside of government control is appealing, especially in countries where state finances are unpredictable. Although the technology is in its infancy, there is the high possibility that its use will expand before long, as more people are beginning to trust the system and move away from government control.