No discussion of cryptocurrencies is complete without understanding blockchain technology, the backbone of the cryptocurrency world. To put it very simply, blockchain is a digital decentralized database where information is stored in such a way that it is very difficult to change, hack or cheat the system. The goal of blockchain is to record the information but not change it. It is a digital ledger of transactions where information is collected in groups (or blocks) and are held in blocks as well. The information is then duplicated and distributed across the wide range of computer systems.
Hence, each block in the chain contains many transactions. Every time a new transaction takes place, a record of the same is added to every participant in that chain.
Of course, this is a simplistic understanding of blockchain technology. The actual technology is much complex and entails various unknown factors.
Blockchain technology has revolutionized the entire financial industry through its inherent benefits such as increased transparency, cost reduction, accurate tracking mechanisms and others. It is important to remember that the use of blockchain technology is not limited to the financial industry only. It is used for settling trades, voting, and many other activities.
Participants in the blockchain network use this technology to confirm transactions without depending on a central authority to do so.
Being a decentralized digital system, cryptocurrencies use blockchain technology for its operation. In fact, blockchain is the foundation of cryptocurrencies.
How? Let us understand.
Blockchain enables cryptocurrency issuing companies to transparently record ledger of payments. Under any banking system, a user’s data is controlled by the central banking system and the government. If the data is hacked, a user’s private information is at risk. In the case of government instability or a bank’s collapse, millions of user data is susceptible to hacking and misuse.
Blockchain allows cryptocurrencies to operate without the requirement of a central authority and store data in a manner that is impossible to hack. This helps in many ways. It provides a stable financial network for countries with unstable currencies. It also connects a user to a wider range of other users, enabling them to do business internationally.
Using cryptocurrencies instead of physical currencies provides financial freedom to people. Also, elimination of any intermediary removes additional costs such as transaction cost.