A Simple Explanation of How Blockchains and Cryptos Work

November 24, 2021

Taking the world by storm in recent years, blockchain technologies and cryptocurrencies are certainly the hottest online trend in the world right now. This revolutionary technology is playing a big role in the transformation of several industries and markets across the globe. Although at first blockchains and cryptocurrencies were expected to impact only the financial world, they are now being used as powerful tools to decentralize structures outside of trading and investments.

Digital currencies were first proposed in the 1980s, but it took nearly twenty years for developers to devise systems and processes that could support and manage these currencies. Bitcoin, initially released as an open-sourced software in 2009, was the world’s first decentralized cryptocurrency. However, since its inception, several other blockchains and cryptos have been created. As of 2021, specialists estimate there could be over 4,000 cryptocurrencies in circulation worldwide, even though the majority of these are relatively small and don’t play a big role within the market.

Despite Bitcoin being the headline cryptocurrency, the market for digital currencies and blockchains is much bigger than that. Many specialists rank Ethereum and Ripple alongside Bitcoin as the world’s top three cryptocurrencies. Other coins, however, also showed significant growth.

In 2021, for instance, tweets by Tesla CEO Elon Musk caused the price of Dogecoin to skyrocket. Although the price of Dogecoin is far lower than that of many other cryptocurrencies, it has grown significantly quicker.

Today, cryptocurrencies are being used as fiat currencies in many industries and markets, and even as legal tender in some countries. Blockchain gaming is causing a complete makeover in the video game industry, and according to PricewaterhouseCoopers, blockchain technology has the potential to generate an annual value of over $3 trillion by 2030. But, before we dive into some of the applications for blockchains and cryptocurrencies, let’s take a look back at the brief history of this trend.

Decades In The Making

Digital currencies have been discussed since the 1980s, especially after David Chaum, an American computer scientist, and cryptographer developed an anonymous cryptographic electronic money. Through the 1980s and 1990s, several other digital currencies were conceived – even the NSA published research about the currencies – however, they did not become completely functioning until the late 2000s.

Finally, in 2009, a group of unknown programmers working under the name Satoshi Nakamoto, using an innovative method to timestamp records, created the world’s first blockchain to serve as a public ledger for the currency they were developing. This currency would turn out to be Bitcoin.

Essentially, a blockchain is a book of records used as a public ledger; records are called blocks, and each block is comprised of timestamps, data from previous blocks, and cryptographic hashes that provide proof-of-work.

Given this structure, blockchains are virtually impossible to be modified, hacked, or even defrauded. With the creation of the blockchain, Nakamoto was able to finish the development of Bitcoin, the first functioning decentralized cryptocurrency.

Since then, numerous other cryptocurrencies – such as Litecoin, Ether, and Binance Coin have been developed utilizing that same blockchain technology. Collectively known as altcoins, these currencies differ from Bitcoin in several ways, including processing time, smart contract functionality, and varying levels of decentralization.

For example, Litecoin’s transactions are much faster than other currencies, whereas Ethereum allows applications and smart contracts to be run on it.

Applications

As we mentioned earlier, cryptocurrencies have been used as fiat currencies in several industries and markets, and many companies have already started accepting cryptos as payment methods. For instance, gambling sites in the US based in states like California and others have recently regulated the iGaming market.

These sites are are now accepting cryptos as a means for deposit, as well as charitable organizations like the American Red Cross, UNICEF, and the UN World Food Program.

Cryptos are also being used to conduct several online transactions, especially for purchasing NFTs, and one of the most well-known uses of cryptocurrencies is for sending and receiving payments at low cost and high speed.

A recent $99 million Litecoin transaction, for example, took barely two and a half minutes to complete and cost the sender only $0.40 in transaction fees. If this had been done through a financial institution, the costs would have been significantly higher, and the process would have taken several days.

Individuals in underdeveloped countries, as well as those under economic sanctions, may also benefit greatly from cryptocurrencies in terms of economic progress and freedom. Due to fewer rules, the crypto market is known to be easier to access than traditional institutions, allowing residents to mine for cryptocurrencys to use, sell, and convert for common goods.

Finally, cryptos have also achieved a new status in some countries. In June 2021, after the Legislative Assembly voted to pass a bill proposed by president Nayib Bukele, El Salvador became the first country in the world to recognize Bitcoin as legal tender –  a movement that was also followed by Cuba in August 2021.

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