Bitcoin and cryptocurrency are words that have become buzzwords over the past few years. But what makes these currencies worth anything?
In December 2017, Bitcoin hit an all time high of $19,783. This was shortly followed by a drop in price of almost half its value within a month’s time. This volatility in price has brought about concerns on the sustainability and practicality of cryptocurrency.
Additionally, Bitcoin is known for usage in illegal transactions over the dark web, such as the transactions on Silk Road. Silk Road was an online dark market, and was shutdown in 2013 by the FBI.
Worries on the ethical use of cryptocurrencies has brought about conversation about regulations of cryptocurrencies as well as their Initial Coin Offerings (ICO).
Although Bitcoin and other coins are growing in popularity, not everyone knows about the specifics of the technology that backs these cryptocurrencies: blockchain technology.
“From a technical perspective, blockchain itself is more interesting than the cryptocurrencies themselves,” Yong Guan, professor in electrical and computer engineering, said.
Along with other technologies like artificial intelligence and virtual reality, blockchain technology is gaining wide attention, with some experts saying it will bring about the Web 3.0.
Blockchain technology is an incorruptible ledger of transactions done on a peer-to-peer network. A peer-to-peer network is a network that is distributed, or shared, between all its users, which allows for transparency of transactions. This ultimately means there is no central body that mitigates or owns the transactions that occur on the network.
When a transaction occurs, miners are required to validate these transactions by solving a cryptographic puzzle. The first miner to solve the puzzle then sends out a signal to the other miners on the network so they can check if the solution to the puzzle is correct and if the person issuing a transaction has sufficient funds.
If approved, the transaction is added to a new block. This new block not only contains the information of the solved transaction, but also serves as a ledger for all previous transactions as well.
For Bitcoin, a new block is created every 10 minutes containing a number of transactions. This sequence of creating a new block, which stores all the previous transactions plus the new transaction creates a chain of blocks, which is what prompted the name blockchain.
The blocks are secure because of the cryptographic function they utilize. Bitcoin, for example, uses the SHA-256 Hash function, which produces a unique signature for each transaction. This signature is almost impossible to guess simply due to the complexity of the actual function. This is what the miners are tasked with solving.
“Blockchain itself can be used in many ways outside of cryptocurrencies,” said Guan.
Guan is currently working with a graduate student to create a secure blockchain solution for a now insecure method of transferring medical files from different hospitals and clinics.
Guan isn’t the only one looking into new applications for the Blockchain technology. Companies like IBM and Microsoft have been exploring the versatility of the technology in their systems as well. Some notable potential applications include the technology’s use in the supply chain industry, providing a transparent method to seeing where the different parts for a final product are coming from.
There are different forms of blockchain technology as well. The blockchain that Bitcoin uses is based on a proof-of-work system which requires a lot work. Proof-of-work is a system by which miners confirm that they have solved a hash.
Pools of miners need a large amount of computing power to confirm transactions which produce large volumes of heat, which is why mining factories are typically positioned near bodies of water.
“There’s a lot of issues and uncertainty with cryptocurrency, blockchain technology, however, is very practical,” Guan said.