- Users make transactions, which are then grouped together and sent out to the network in a cryptographically protected block. Individual blocks must contain a Proof of Work to be considered valid (other cryptocurrencies might use different methods of validation).
- Miners carry out Bitcoin mining, which is the process of adding transaction records to Bitcoin’s blockchain. The blockchain serves to confirm transactions to the rest of the network as having taken place. Bitcoin mining is intentionally designed to require a lot of resources, to ensure that the number of blocks found each day by miners remains steady, albeit decreasing over the years to reach the pre-set limit of 21 million bitcoins. In return for their efforts, miners receive bitcoins and transaction fees.
- Developers are allowed to tweak the underlying code, but would first require approval from the community before doing so.
The key benefits of Bitcoin are that transactions are fast, cheap and secure. Furthermore, it is decentralised, compared to fiat currencies. Fiat currencies are legal tender backed by the central bank of a country, e.g. the US dollar is managed by the US Federal Reserve. But in a decentralised system, no central intermediary controls the currency, allowing users more freedom. One last important benefit of Bitcoin is that transactions are immutable—transactions made are irreversible and set in stone, for better or worse.
Benefits aside, there have also been several concerns regarding cryptocurrencies. Firstly, Bitcoin transactions have been slowing down, due to the sheer number of transactions. Daily transactions have increased significantly over the past few years to hundreds of thousands today. Secondly, this pushes up transaction fees. Lastly, there have been security concerns too, exemplified by the 2014 Bitcoin Mt. Gox scandal, where US$460 million worth of bitcoins was allegedly stolen by hackers.
Regardless of the concerns posed, cryptocurrencies have enjoyed staggering success. Bitcoin leads the pack with a market capitalisation of US$41 billion, at the time of writing. 2017 has been a particularly good year for most cryptocurrencies. While Bitcoin may have impressively doubled in value, this growth seems minuscule compared to the second biggest cryptocurrency, Ethereum, which has by increased about forty times in value since the start of the year.
Time will tell whether this growth is driven by speculative activity or sustainable, but it has certainly caught the attention of the world. And we’re watching the popularity of cryptocurrencies with keen interest!
Besides its function as a store of value, what stands out is the underlying blockchain technology. It disrupts the current trust-based system of centralised intermediaries, with its “trustless” nature—reducing users’ reliance on financial intermediaries. And Bitcoin as an application of blockchain technology is but a drop in the ocean. With blockchain technology, we can make micro-transactions (in cents even!), make self-automated smart contracts, vote digitally, and do so much more!
If you’re daunted by the complexities of blockchain technology in finance, be even more afraid, for blockchain technology is being modified and evolving constantly. It is also due for a major update in August to address its scalability.
Blockchain technology is likely to revolutionise the Internet as we know it and transform our world. Opinions on the impact of blockchain and cryptocurrencies are mixed, but the ride will continue, with thrilling loops and turns ahead for us.