Taking confusion out of cryptocurrency
Everyone nowadays seems to be talking about cryptocurrency and blockchain technology. These are commonly used key phrases—like say, “quantum physics”, that most of seem to understand in a vague way but are not sure of the detail or implications of this. So too cryptocurrency.
Let me try and unbundle this technology for you. Cryptocurrency consists of a number of digital currencies or assets—the most widely known and recognised being Bitcoin—that uses cryptography or encryption to secure and verify transactions on the internet.
This encryption is almost impossible to break in practice, ensuring that such transactions are secure and valid. Therefore, transferring information or assets or making payments across the internet becomes immediate and secure.
Let us compare it with a generic online banking system. If you wish to transfer some money to a recipient anywhere in the world, both of you will need access to a mobile banking application and a bank account. You will also, obviously need to have a credit balance in your account.
Once done, this information is transmitted to your banks centralised database, usually held on servers, to validate, and then the transaction is completed to the recipient. The same applies to credit or swipe card transactions—the banks servers keep a record of your personal data and automatically verify this information centrally and validates the transaction.
All of us in Malawi will have fond memories of non-service at ATMs and banks, when that centralised server goes down? This is known as a client server network, with the clients being ATMs, mobile or computer devices. Without the server, this network cannot function.
Now, cryptocurrency uses block chain technology to create a decentralised network for validation, which does not require a server. This is the clever bit, and it uses a vast network of peer-to-peer computers that all validate the transaction.
This creates a public ledger of all transaction that ever happened within the network, available to everyone. This gave birth to cryptocurrency. A peer to peer network is a group of interconnected devices—as simple as your home network which connects to each other wired or wirelessly or through the internet.
With this setup, digital data such as media or information can be shared between users. Permission to share must be granted by each user, and you can specify which users can and cannot access the data present on your computer.
I hope you are with me so far? Ok, now to carry out a cryptocurrency transaction. You want to send 10 Bitcoins to your partner in another country. You will need yours and your partners public keys—also known as wallet addresses (which you have registered previously) and the amount of coins transferred.
The transaction also needs to be signed off by you with your private key. This transaction now needs to be confirmed before it can be completed. To do this, the transaction is broadcast to a number of what are called “miners” who are approved to confirm the transaction.
Once confirmed by consensus, the transaction is completed, and this data is now permanently updated onto every peer database throughout the network. This makes it almost impossible to change—as would be the case on a hacked centralised server. This transaction is now irreversible, anonymous, fast and secure.
So—what do the “miners’; get out of this? Well, they get paid in cryptocurrency for every transaction processed. In theory, anyone—you or I included—can become a miner. It is not simple, but a lot of guidance is available on the web.
So, what can be bought with cryptocurrency? More and more merchants are adopting this as a means of payment for goods or services. The simplest way to do this is to purchase gift vouchers which can be used at many retailers. It can also be used to purchase flights, holidays, university courses, cars, even buy gold bullion.
Microsoft Store accepts cryptocurrency for their games, and other products. Make no mistake—cryptocurrency is here to stay. Block chain technology can be used in a number of different ways—some believe it will revolutionise online business.
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