Photo Credit: Reuters
People often ask if Bitcoin is a safe investment not because of the market's legendary volatility, but because they're worried about the security of the digital asset. Bitcoin is one of the most popular cryptocurrencies in the world and has been around since 2009. Since then, in over a decade, the network has proven to be very resilient and powerful in protecting vital information. In recent years, the blockchain technology that Bitcoin runs on has become increasingly prevalent as cryptocurrency has begun to take center stage in many markets.
Blockchain technology that runs the virtual currency is known for its unparalleled security. It's one of the main reasons for its rapid adoption, with Bitcoin being one of the biggest success stories of the technology.
Blockchain is associated with cryptocurrencies such as Bitcoin, Ethereum, and others, as a platform for digital money transactions. It's a database of all cryptocurrency transactions worldwide. However, this technology has also been used to store other types of data like medical records, data on humanitarian aid, and more.
Blockchain technology is like a ledger that is digital and open to the public. It provides a secure way of making and recording transactions. All transactions made using cryptocurrency are recorded and saved as data on blocks. All this information is time-stamped.
The easiest way to understand blockchain technology is to remember it as a series of blocks that store data. Each of the blocks holds a unique hash number and a link that connects it to the previous block. Every block is an important part of the sequence and it cannot be changed. If there is any change, the hash sum would alter and the block would longer be valid. This invariability is the foundation of blockchain' security along with three other aspects that we will look into below:
All blockchain transactions are secured by cryptography. Each block contains essentially a unique and private key that can be verified with a public key. If there is a change in transaction-related data, the block unique key becomes invalid. As a result, the block is discarded from the chain.
Blockchain technology is secure as it is decentralised and distributed. There is no single point of failure, which makes it much harder to corrupt. Hacking into one part of the system cannot affect other parts. However, in the case of a private blockchain, this advantage is partially lost as they have a single point of control and a limited number of nodes. This restricts users from making changes to the ledger. Organisations operate these kinds of blockchains for their internal use, as it allows the company to control its own processes.
All blockchain technology operates through a consensus model, which verifies that a transaction has taken place and legitimises it. Most consensus models run on protocols that include proof of work, proof of stake, proof of authority, etc.
The cryptographic system makes transactions irreversible — in other words, a block once created on the chain cannot be modified. However, you can add information to it. This restricts people from being able to reverse any transaction that has already taken place.
The Bitcoin blockchain is public. While the words transparency and public do not sound safe, in the case of Bitcoin it is. Despite the anonymity of the user, all transactions on the network are accessible to the public, making it difficult to hack or cheat the system.
It is decentralised. The Bitcoin network is distributed and has thousands of nodes all over the world that keep track of all transactions happening on the system. This ensures that in case something goes wrong on one server, there are others to pick up the slack. Hacking into any one server is pointless.
This is not to say that it is foolproof or impossible to hack — but it certainly isn't easy either. With Bitcoin and other cryptocurrencies, you're more likely to suffer losses from bad investing, or be tricked into giving up your coins, than to have them hacked away from you.