Bitcoin and Blockchain – Understanding These Technologies

At this point, you are probably already familiar with the term Bitcoin. The media is all over it. You have heard some good and bad things about it; ‘It is a scam, don’t trust it’; ‘it is a Ponzi scheme, people are going to lose all their money on it’; and of course, ‘I’ve tripled my investments in two weeks!’.

Well, there is a lot being said about Bitcoin and altcoins (alternative cryptocurrencies), such as Ethereum, Namecoin, Dogecoin etc. One thing is for sure: they are here to stay and are not going anywhere. They are already revolutionizing trade and the way business is done. There is no way back. So, the best thing to do is try to understand how one can be a part of it.

For sure, it may be hard to really understand how these ‘coins’ work under the hood. For instance, they are not really coins. They are not just about money. They are digital tokens. Digital technology, for example, is something that banks have for a while been making it available through internet banking. Cryptocurrencies are much more than all that. To understand them, you need to forget everything you know about traditional money. Don’t worry, we are going to make things clearer.

There are four main technologies behind Bitcoin: Blockchain, proof-of-work, P2P and cryptography.

Simply put, Blockchain is the core foundation of Bitcoin; it is a decentralized platform network where assets can be safely and anonymously trade. When enough transactions are made, they are put together to form ‘blocks’ of information; the new blocks are them added and linked to the previous ones – containing all previous transactions – in a relation that goes all the way to the genesis block; the first one, invented by the creator of the technology, known as Satoshi Nakamoto:

Proof-of-work is related to what is commonly called ‘bitcoin mining’: it is a mechanism where participants of the Blockchain network can validate the transactions by solving mathematical puzzles. Miners who get the right answer are rewarded with Bitcoins for their work, a payoff for their computational effort.

P2P (peer-to-peer): it related to direct transactions; that does not require third-party validation (e.g. Banks). More important than that: for a transaction to be validated, it must be approved by more than 50% of the network. If, for some reason something is off, the network (aka all the computers part of the Bitcoin network) is not going to accept the transaction.

Finally, cryptography allows for secure transactions. The parties are not identified; they have access to their bitcoins by utilizing a private key, which they must keep safe. When parties trade, they use a public key; this is the one that ‘miners’ are trying to validate to earn bitcoins. Once it is validated, the transaction data is recorded in a block.

The relevance here is that everything can be traded through a Blockchain platform. Bitcoin only scratches the surface. Another very important part of Blockchain technology are ‘smart contracts’, which allows for parties to automatically execute agreements: in other words, you provide a service and the network makes sure you get paid.

This is where international trade comes into play: smart contracts can – and will – be widely utilized by governments, businesses and institutions. Blockchain has the potential to provide for a safer trade environment.

The future is promising for all areas impacting international trade, from legal to practical aspects, such as logistics. To know more about blockchain applications in international trade, stay tuned to Sidera’s future blog posts.