A crypto-currency is a modern form of digital asset based on a network spread over a large number of computers. A cryptocurrency is protected via cryptography which makes counterfeiting or double-spending almost impossible. Many cryptocurrencies are decentralized and based on the blockchain-network— a distributed ledger enforced by a disparate computer network.
“Crypto” refers to the various encryption algorithms and cryptographic methods that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hash functions.
One defining feature of cryptocurrencies is that they are usually not distributed by any central authority, making them potentially resistant to intervention or exploitation by the government. Cryptocurrencies are systems that allow secure online payments to be denominated as virtual “tokens,” represented by internal system ledger entries.
The first crypto-currency based on blockchain was Bitcoin, which still remains the most popular and valuable. Today, thousands of alternate cryptocurrencies have different functions and specifications. Some of these are Bitcoin clones or variants while others are new currencies that have been created from scratch.
Some of Bitcoin’s popularity spurred rival cryptocurrencies, known as “altcoins,” including Litecoin, Ripple, Monero as well as Ethereum, Cardano, and EOS.
Cryptocurrencies hold the promise to make it easier to transfer funds directly between two parties, without the need for a trusted third party such as a bank or credit card firm. Instead, these transfers are secured through the use of public keys and private keys and various forms of incentive systems, such as Proof of Work or Proof of Stake.
A user’s “wallet,” or account address, has a public key in the cryptocurrency systems, while the private key is known only to the owner and is used to sign transactions. Fund transfers are completed with minimal processing fees, which enable users to avoid the steep wire transfers/fees charged by banks and financial institutions.
The semi-anonymous nature of cryptocurrency transactions makes them suitable for a host of illicit activities, such as money laundering and tax evasion. Crypto-currency advocates, however, often highly value their anonymity, citing privacy benefits such as protection for whistleblowers or activists living under repressive governments.
For example, Bitcoin is a relatively poor option for conducting illegal business online, as the Bitcoin blockchain’s forensic analysis has helped authorities arrest and prosecute offenders. Nonetheless, there are more privacy-oriented coins such as Dash, Monero or ZCash which are much harder to trace.
Blockchain is simply a chain of blocks at its most basic level but not in the traditional sense of those terms. In this context, when we say “block” and “chain,” we’re talking about digital information (the “block”) that’s stored in a public database (the “chain”).
“Blocks” are composed of encrypted pieces of information on the blockchain. Blocks have three components:
When a block stores new data, it generates a new hash and is added to the blockchain. In order for a block to be added to the blockchain, however, four things must happen:
When that new block is added to the blockchain, it becomes publicly available to anyone to view— even you. If you take a look at Bitcoin’s blockchain, you will see that you have access to transaction data, along with information about when (“Time”), where (“Height”), and by who (“Relayed By”) the block was added to the blockchain.
Is Blockchain Private?
Anyone can access the blockchain’s contents but users can also choose to connect their computers as nodes to the blockchain network. In doing so, their computer receives a copy of the blockchain that is automatically updated every time a new block is added, like a Facebook News Feed that provides a live update every time a new status is posted.
Each computer in the blockchain network has its own copy of the blockchain, meaning there are thousands of copies of the same blockchain, or in the case of Bitcoin, millions. Even though every copy of the blockchain is identical, distributing the information across a computer network makes it harder to exploit the database. There isn’t a single, definite account of events that can be manipulated with blockchain. Rather, every copy of the blockchain on the network would need to be manipulated by a hacker. And this is next to impossible to carry out. That is what blockchain is meant to be- a “distributed” ledger.
However, if you look over the Bitcoin blockchain, you’ll notice that you don’t have access to identifying information about the transaction users. Although the blockchain transactions are not entirely anonymous, personal user information is limited to their digital signature or username. This raises an important question: if you do not know who is adding blocks to the blockchain, how can you rely on blockchain or the computer network to uphold it?
Is Blockchain Secure?
Blockchain technology takes account security and trust issues in several ways. Firstly, new blocks are always stored chronologically and linearly. This is, they’re always added to the blockchain’s “end.” If you look at the blockchain of Bitcoin, you’ll see that every block has a position on the chain, called a “height.” As of January 2020, the height of the block had topped 615,000.
After adding a block to the end of the blockchain, it is very hard to go back and alter the block’s contents. That’s because each block has its own hash, along with the hash of the block before it. Hash codes are created by a math function that turns digital information into a string of numbers and letters. If that information is edited in any way, the hash code changes as well. The slightest change in data will alter the hash and users can see a change has taken place.
Here’s why that’s important to security. Let’s say a hacker attempts to edit your transaction from Amazon so that you actually have to pay for your purchase twice. As soon as they edit the dollar amount of your transaction, the block’s hash will change. The next block in the chain will still contain the old hash, and the hacker would need to update that block in order to cover their tracks. However, doing so would change that block’s hash. And the next, and so on.
In order to change a single block, then, a hacker would need to change every single block after it on the blockchain. Recalculating all those hashes would take an enormous and improbable amount of computing power. In other words, once a block is added to the blockchain it becomes very difficult to edit and impossible to delete.
To address the issue of trust, blockchain networks have implemented tests for computers that want to join and add blocks to the chain. The tests, called “consensus models,” which require users to “prove” themselves before they can participate in a blockchain network. One of the most common examples employed by Bitcoin is called “proof of work.”
Proof of Work (POW)
In a POW system, computers must “prove” that they have done “work” by solving a complex computational math problem. If a computer solves one of these problems, they become eligible to add a block to the blockchain. But the process of adding blocks to the blockchain, what the cryptocurrency world calls “mining,” is rather difficult. In fact, the odds of solving one of these problems on the Bitcoin network were about one in 15.5 trillion in January 2020. To solve complex math problems at those odds, computers must run programs that cost them significant amounts of money power and energy.
Proof of work does not make attacks by hackers impossible, but it does make them kind of useless. If a hacker wanted to coordinate an attack on the blockchain, they would need to control more than 50% of all computing power on the blockchain so as to be able to overwhelm all other participants in the network. Given the tremendous size of the Bitcoin blockchain, a so-called 51% attack is certainly not worth the effort and more than likely impossible.
Proof Of Stake (POS)
In a POS system, a person can mine or validate block transactions propotionately to how many coins he or she holds.
This means that the more Bitcoin or Altcoin owned by a particular miner, the more mining power he or she has. With Proof of Stake (POS), Bitcoin miners can mine or validate block transactions based on the amo unt of Bitcoin a miner holds.
POS was created as a more efficient and sustainable alternative to POW which requires high amounts of energy to perform complex math functions. Proof of Stake (POS) is seen as less risky in terms of the potential for miners to attack the network, as it structures compensation in a way that makes an attack less advantageous for the miner.
When a transaction is initiated, the transaction data is fitted into a block with a maximum capacity of 1 megabyte, and then duplicated across multiple computers or nodes on the network. The nodes are the administrative body of the blockchain and verify the legitimacy of the transactions in each block.
POS seeks to address this issue by attributing mining power to the proportion of coins held by a miner. This way, instead of utilizing energy to answer PoW puzzles, a PoS miner is limited to mining a percentage of transactions that is reflective of his or her ownership stake. For instance, a miner who owns 3% of the Bitcoin available can mine only 3% of the blocks in theory.
The purpose of blockchain is to enable the storage and dissemination of digital information, but not editing of said information.
Blockchain technology was first outlined in 1991 by Stuart Haber and W. Scott Stornetta, two researchers who wanted to implement a system that couldn’t tamper with document timestamps. But it wasn’t until nearly two decades later that blockchain had its first real-world implementation, with Bitcoin launched in January 2009.
The Bitcoin protocol is built on the blockchain. In a research paper introducing the digital currency, Bitcoin’s creator Satoshi Nakamoto referred to it as “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.” Transactions made in bitcoin are verified by a network of computers. This is what is meant by the Bitcoin network and blockchain being “decentralized.”
When a person pays another for goods or services using bitcoin, computers on the Bitcoin network quickly verify the transaction. In order to do so, users run a program on their computers and try to solve a complex mathematical problem, called a “hash.” When a computer solves the problem by “hashing” a block, its algorithmic work will have also verified the block’s transactions. Then the completed transaction is publicly recorded and stored as a block on the blockchain, at which point it becomes unchangeable. In the case of Bitcoin, and most other blockchains, computers that successfully verify blocks are rewarded for their labour with cryptocurrency. This is commonly referred to as “mining.”
Although transactions are recorded on the blockchain which are public, user data is not—or, at least not in full. In order to conduct transactions on the Bitcoin network, participants must run a program called a “wallet.” Each wallet consists of two unique and distinct cryptographic keys: a public key and a private key. The public key is the location where transactions are deposited to and withdrawn from. This is also the key that appears on the blockchain ledger as the user’s digital signature.
Even if a user receives a payment in bitcoins to their public key, they will not be able to withdraw them with the private counterpart. A user’s public key is a shortened version of their private key, created through a complicated mathematical algorithm. Therefore, if users want to withdraw their funds, they must use their private key to access those funds. It is worth mentioning, due to the complexity of this equation, it is almost impossible to reverse the process and generate a private key from a public key. For this reason, blockchain technology is considered confidential.
Public key cryptography makes use of a pair of a public key and a private key to perform various tasks. Public keys are distributed widely whilst private keys are kept secret. It is possible to encrypt a message using the public key of a person, so that only the person with the private key can decode and interpret it. A digital signature can be created using a private key, such that anyone with the same public key can check that the message has been created by the private key owner and has not been changed since.
And private – public key works together so that I can use a private key to sign, sign digitally, any message or transactions in the case of cryptocurrencies. You can then take the public key that anyone can know and use it to verify that the one that actually signed that message / transaction was my specific private key.
Finally, without a doubt, you will know that I am the one who generated the letter, and that no one claimed to be giving it to me. This is the basic working of how people trade digital currencies back and forth.
Lets say I decide I’m going to pay you two bitcoins and do it out of my hardware wallet or any software wallet, any kind of digital currency like Bitcoin, your private key is the only thing that’s kept in your wallet device and it never leaves. That means if I want to send you some money, all I do is access the private key on this device to sign a message that gets transmitted to the blockchain, that says I pay you some Bitcoin or some Ether or some Litecoin, and my public key is used to verify that that message actually came from the wallet that says it did. I haven’t lost the money that’s in it if I happen to lose it, because there is no money in it. All the funds transferred are recorded on the blockchain and as long as I can remember or recover my private key, I can simply get a new device and start using my private key again and continue trading.
In a nutshell, this is how public and private keys work on the blockchain. They are used to sign and verify any transactions that you make. You must NEVER share your private key, you only share your public key because if you do share your private key, anyone can access your digital wallet and steal your money.
A digital wallet is a software which stores cryptocurrencies. To be technically accurate, bitcoins are not kept anywhere; there is a private key (secret number) for each Bitcoin that is saved in the crypto wallet of the person who owns the balance. Crypto wallets make it easier to send and receive crypto currencies, and give the user ownership of that particular cryptocurrency balance.
A cryptocurrency wallet is essentially a software program that stores private and public keys and interacts with different blockchains to allow users to send and receive digital currency and monitor their balance. If you want to http://blockgeeks.com/guides/what-is-bitcoin-a-step-by-step-guide/trade cryptocurrencies http://blockgeeks.com/guides/what-is-cryptocurrency/, you will need to have a digital wallet.
When a person sends you bitcoinshttp://blockgeeks.com/guides/how-to-buy-bitcoin/ or any other type of digital currency, they are essentially signing off ownership of the coins to your wallet’s address. To be able to spend those coins and unlock the funds, the private key stored in your wallet must match the public address the currency is assigned to. If the public and private keys match, the balance in your digital wallet will increase, and the senders will decrease accordingly.
There is no physical transfer of coins between two people. The transaction is merely a record on the blockchain and a change in balance (increase or decrease) in your crypto wallet.
Crypto wallet comes in many forms; desktop, online, mobile, and hardware are the four main types of wallets. Listed below is a brief description of the 4 types of wallets.
Digital Wallets are, to varying degrees, secure. Security levels depend on the type of wallet you are using (desktop, cloud, mobile or hardware) and the service provider. A web server is a riskier for keeping your currency off line. Online wallets can expose users to hidden vulnerabilities within the network that hackers can exploit to steal your funds. On the other hand, offline wallets cannot be hacked, because they are simply not connected to an online network and do not rely on a third party for security purposes.
Although online wallets have proven to be the most vulnerable and susceptible to cyber attacks, when using any wallet, strict security precautions must be enforced and followed. Note that losing your private keys would cause you to lose your money no matter what wallet you use. Likewise, if you get hacked and your wallet is used to send money to a scammer, there is no way to reclaim lost currency or reverse the transaction. You need to be very careful and take precautions!
Be sure to back up your wallet. Save only small amounts of currency online, on your computer or on your smartphone for daily use, holding the vast majority of your funds in a high-security environment. Cold or offline backup storage options such as the Nano Ledger or USB will protect you against computer failures and enable you to recover your wallet in case it is lost or stolen. However, it won’t protect you from eager hackers. The reality is that there are inherent risks that can’t always be protected against if you choose to use an online wallet.
Keep your software up to date so you have access to the latest security enhancements. Not only your wallet software but also the software on your computer or mobile should be updated on a regular basis.
Add extra layers of security. The more protective layers, the better. It’s a start to set long and complex passwords and ensure any withdrawal of funds requires a password. Using wallets that have a good reputation and provide additional security mechanisms such as two-factor authentication and additional criteria for pin code any time a wallet application is opened. Additionally, you might want to find a wallet offering multisig transactions such as Armory or Copay.
Not 100%. Although wallets aren’t tied to a user’s actual identity, all transactions are stored on the blockchain publicly and permanently. Details like your name or personal street address won’t be visible, however details such as your wallet address could be traced to your identity in a variety of ways. Efforts are under way to make it easier to achieve anonymity and privacy. There are obvious downsides to total anonymity.
There is an ever-growing list of options. Before picking a wallet, you should, however, consider how you intend to use it:
Take some time to assess your requirements and then choose the most suitable wallet for you.
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