The Basics of Blockchain: What Makes it So Secure?

Did you know that El Salvador recently became the first country to adopt Bitcoin as legal tender? The move has caused numerous investors and millennials alike to pose an interesting question. Could cryptocurrency replace national currencies within the next decade?

Back in 2018, reports showed that cryptocurrencies were set to displace roughly 25% of national currencies by 2030. However, in discussing the emergence of crypto as legal tender around the world, it’s important to not confuse cryptocurrencies with the technologies that make up the building blocks of them. 

Blockchain is the real focus here. Why? It's what is driving revolutionary changes in the banking and financial industries. It's paving the way for decentralized currency and returns the power back to the people.

With the ability to engage in safe and secure trading of just about anything, from money and ideas to copyrights and fees, blockchain will lead to safer transactions while also cutting out the middleman. The limited security risk that blockchain provides users make it an ideal manner in which to conduct various types of businesses, investments and payments. 

However, you’ll want to understand just how it works first and what exactly makes up these little blockchains. What makes blockchain technology secure and how do you know it’ll continue to be safe if you’re investing in cryptocurrency? Here’s what to know.

Ready to start investing today? You can find videos and help with investing in cryptocurrencies over at the Wealth Stack app. Download it for free today.

What is Blockchain Technology?

A blockchain is exactly what it sounds like - a chain of digital blocks that all contain data. Chains are used for various things. However, when they are used as part of cryptocurrencies they contain data surrounding financial transactions.

As for what makes it so secure and popular for financial industries? The fact that each block is connected to the block before it means that it’s difficult to intercept and tamper with the data contained in the chain as a whole. This type of sequencing ensures that anybody looking to hack into the data would have to change the entire sequence. That's a time-consuming and difficult process that often wards hackers away from the task.

Now, as these transactions are occurring, they are sent to the bitcoin network where people all over the world are running high-powered computers. These computers work to solve complex mathematical equations and ultimately participate in hashing, which is just a fancy term for computing the data in a blockchain sequence. 

Whoever solves it is awarded, you guessed it: Bitcoin! Still with us? Great. Let’s keep going.

What Are the Main Components of a Blockchain?

According to CoinDesk, the three components of blockchain technologies in relation to bitcoin and cryptocurrencies are:

1) Private key cryptography. This component allows users to create a secure digital identity reference by using both public and private keys. Together, they act as a digital signature of sorts that is much more complex and secure than a real digital signature you might use online.

2) A distributed network that includes a shared ledger. This network acts as a bit of a verification and security process for users. Imagine cameras in a bank that can monitor people coming in and out. Well, instead of cameras, blockchain uses mathematical verifications to ensure that a transaction is carried out safely.

3) Means of accounting for the transactions and records related to the network. This means pretty much exactly what it says and works in a similar fashion as digital banking records do now. These records, however, are broadcast to what are called “nodes” and stored in the network to ensure there’s a “copy” if it is needed.

What Keeps Your Data Safe?

Due to the three components listed above, blockchain is a lot safer than other digital financial processes. Cryptography ensures that users have their own private keys that are specific to each individual transaction. 

And, due to the fact that blockchain relies on a network servicing protocol, there is a system of checks and balances, so to speak, that ensures it is constantly being verified. After a transaction is made, a block containing a digital signature, the timestamp of the transaction and any relevant information is sent to all nodes in the network. 

The pure size of this network and the computer power it embodies ensure that it is safe, at least compared to other digital currencies and technologies. 

What’s So Great About Blockchain?

While this all might seem like an insanely complex process just to move money around in a digital way, there are many benefits to blockchain besides being more secure than other digital finance technology. 

Traditional digital banking and currency rely on institutions such as banks that store data on a database. Because they are owned by one entity they are much more subject to cyber attacks that can cripple the entire system, whereas because blockchain isn’t “owned” by any one entity or institution, it is much harder to attack.

The same is true about blockchain not being centralized. Because it’s not located on one network functioning within one institution, if one part goes down, it doesn’t all crash.

Looking Forward to the Future: How Blockchain Affects Financial Institutions

Blockchain technology is basically what powers the digital currency industry and makes it possible for cryptocurrency to even exist, so to say that it’s important is an understatement. The development of cryptocurrency is perhaps the biggest revolution in finance ever to happen to the global economy and will affect the future of banking. 

Seeing as digital finance has the potential to reach over 1.6 billion new retail customers, it’s a pretty big deal. As blockchain becomes more secure, more and more people can invest in further development and widespread use of cryptocurrency. 

These impacts will eventually alter the way that banking institutions function as blockchain will become so mainstream and secure that governments will begin to have less of a monopoly on the money people store with them. 

Banks will no longer physically be holding onto cash and neither will the average person. This will cause the entire global system of banking to change radically. Ultimately, it will also revolutionize the way people manage and interact with their own money as well as make transactions in everyday life.

Should You Invest in Cryptocurrency?

Understanding the basics of blockchain as a beginner investor can allow you to properly assess the risks of investing in cryptocurrencies. If you’re looking for a straight answer then here’s what we suggest:

Learn how to invest in general. Learn about what makes a good investment. And, learn about what you should be thinking of before you start investing in the first place. This means getting your finances in order, improving your credit score, working on a budget, and so much more. Then, you’ll be ready to learn the basics of investing.

You’re ready now? Download the Wealth Stack app for free to start viewing video courses on finance and investing.