DeFi
September 28, 2022
What is Token Burn and it's effects on price
An A-Z guide on token burning and how it is largely impacting the cryptocurrency industry.
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As there are new things going around the internet, a large amount of the audience is influenced by the same. When someone introduces a new technology it is not long before it catches attention and becomes a trend or at least something that people keep talking about as it keeps gaining popularity.
One of these things that have been around for quite a while now is Bitcoin or you may say cryptocurrency. Everyone wants to know what it really is and wishes to understand how it works. Well, while getting introduced to cryptocurrency one of the most basic terms that you will come across is blockchain.
Understanding what blockchain is can be a little hard but it doesn’t have to be and that’s what we’re here for. In this article, we will talk in detail about what a blockchain means, its key features, advantages, and disadvantages. So, let’s begin with the most basic question; what is blockchain?
You can think of blockchain as a series of databases of the transactions carried out recorded on different blocks in a digital format. This database is distributed among various computer systems. A blockchain is nothing but a digital ledger that is decentralized which means it does not come under any controlling authority.
The blockchain system plays a vital role in the working of Bitcoin. The data or information of the crypto transactions that are stored on blocks is safe and secured. The system is trustworthy as it safeguards the transaction data without any intervention of a third party.
The transaction data is recorded and stored on different blocks which make a chain. These different data blocks are linked together in a chain with the help of cryptography. Now, each block has its own storage capacity and so when it is full the next block is linked and filled up, hence forming a chain in chronological order.
The data that is recorded on a blockchain is immutable as it cannot be changed nor it can be removed or altered. Once an entry is made it becomes permanent and stays on the blockchain forever for anyone to view the transaction records.
There are a lot of concepts and terms about cryptocurrency which are new to the majority of people. Now that you know the term blockchain and what it means, it’s possible that some of you might get confused between bitcoin and blockchain. Let’s clear out all the confusion.
Bitcoin is a popular cryptocurrency secured by cryptography using blockchain. Bitcoin definitely makes use of blockchain technology but it is not the same as blockchain by any means.
Similarly, Blockchain is not bitcoin or a cryptocurrency but a security system incorporated by the cryptocurrency as a secured ledger. In fact, blockchain technology has existed since 1991 whereas bitcoin arrived eighteen years later in 2009.
Bitcoin has implemented blockchain technology to record transactions which will be open to the public and is unchangeable to keep the integrity of bitcoin intact. There are many different cryptocurrencies which make use of the same blockchain technology as a public ledger.
As we are slowly moving to a digital and more connected world, we need more secured, decentralized, transparent and trustworthy alternatives to the existing systems. Blockchain is one such technology which can be utilized to make a lot of existing systems better than before.
However, currently the blockchain is majorly adopted by cryptocurrencies as a ledger for transactions. Bitcoin's blockchain primarily offers 3 key features which we are going to discuss now. Any other cryptocurrency utilizing blockchain will work in the similar manner as bitcoin.
If you have been closely following news about cryptocurrency, you might have seen people posting news about someone buying a particular amount of bitcoin or transferring bitcoin worth of certain money. Although you get to see these details, you will never be able to know who was the person behind the transaction.
That’s the level of transparency bitcoin’s blockchain offers. Probably that’s one of the reasons for people trusting Bitcoin and other cryptocurrencies. The blockchain provides transparency without compromising the privacy of the user. You wonder how? Well let’s understand that as well.
Bitcoin has a public ledger which is open to everyone. Which means every transaction happening on the blockchain can be viewed by anyone on that network. Every user has a copy of that ledger which can be accessed by using a personal node or blockchain explorers.
Using the personal node, you can track live bitcoin transactions which keep on updating as new blocks are added. Thus there is transparency in the system and any doubtful transaction can be tracked to its final source.
Although that does not mean that your privacy is nor respected on the blockchain. Infact, all these records stored on each block of the blockchain are well encrypted and can protect your identity.
If you are aware of how decentralization works then you would not have to think too hard to understand how blockchains work as a decentralized body. The traditional kind of currency is the world is all centralized by the specific country's government and they handle all the transactions happening in a certain way.
Blockchains change that system entirely when they decentralize the currency. Blockchains do not allow any of the data stored on them to be given all to a single body and rather it is spread out to multiple computer nodes i.e. to a number of networks at the same time, that is what makes it decentralized.
This way, a single body is not in control of the data and that makes the system more resistant to damage. So even if someone tries to manipulate some data from one node, the same data wouldn't get changed all over the other servers.
There are a number of ways in which blockchain ensures the complete safety of all the data and assets in it. One of the most basic but most secure ways to make sure the blockchain is safe is that whenever a block is added to the chain, the block gets added to the end of the chain.
So now if someone wants to alter any data or information on the blockchains, they will have to go all the way back to the beginning to alter it and that can't be done easily or quickly.
To change a block that was added to the chain, the majority of the blocks should have data similar to the altered one which is next to impossible as newer blocks are constantly added to the blockchain.
Each of the blocks in the chain have their own Hash along with a timestamp and these make it difficult for any changes to be made. Hash codes translate any data into numbers and letters and the hash code will change if that information is tampered with.
So if an individual makes changes to a block of which they have a copy, the same change wouldn't be made to everything over the network, rendering the change useless. For someone to change a block or hash code, they would need to have the control of more than 51% computer nodes at the same time.
Cryptocurrencies and their adjacent networks have been growing at a very fast pace and for someone to be able to hack into it or make changes to the data is near impossible.
So even if someone manages to hack the blockchain by some miracle, the users would come to know and they can make changes to the blockchain by hard forking and thus, a new chain would be made and that would make the previous version of the chain to lose its value.
Like everything else, blockchains come with their own set of advantages and disadvantages. There are a number of things like providing ease-of-use to a user or the high security it offers that blockchains should be preferred for.
But then again, it has some issues like being misused for illegal activities or a lot of expenses going just to mine the cryptocurrencies. Let us have a look at all the advantages it provides and then we'll get to the disadvantages part.
Advantages:
The technology involved is very transparent because of how it is decentralized and hence, a lot more secure as well. Almost all of the blockchains are open-source softwares and hence anyone who wants to view its code can do it.
That is the reason anyone can review it and suggest changes to better the technology involved in it and the upgrade can be done if the majority of the users agree to it.
There are no 3rd party verifications required and hence the cost is reduced along with improved accuracy because of human involvement not being present.
With the traditional currencies, a bank would verify the details of all the transactions but with blockchains, that is not the case. The blockchain itself verifies the transaction, eliminating the 3rd part needs.
It provides a very secure alternative to the traditional currencies that everyone in the world uses. These blockchains are open to the public and that's why they can see all the transaction details.
However, the identity of the people involved is kept a secret. Every transaction that happens on the blockchain is recorded, without the identity of the user and all the nodes confirm the genuinity of the transaction.
Yes, there are some drawbacks of blockchain, but that doesn't prove anything about blockchain. Nothing is perfect in this world, and if it’s perfect, then it is not of this world. Coming back to the point, blockchain have some significant drawbacks which affect the system in many ways
Before going in deep and understanding what causes the problems, we’ll try to give an overview so you can better understand the flow and how the issues get worse.
Disadvantages:
The technology a cryptocurrency uses is electricity. Mining a coin consumes electricity in large amounts. You can understand the depth of this issue by comparing the electricity Denmark consumes annually and the electricity of all bitcoin networks, they both are almost the same.
Mining consumes a huge amount of electricity and every miner is aware of it because it is all over the news, the reason they still continue with mining is when a miner adds a block they are rewarded with ample amount of cryptocurrency so they can afford paying electricity bills and have their own credits.
The major issue is, as the world is developing rapidly the use of electricity in some regions is higher than production rate and this is affecting the industry. So solutions to these problems are brought by introducing Mining farms, wind farms, solar power and last but not the least excess natural gas from fracking sites.
Even though the blockchains are very secure about your data, sometimes there can be inefficiencies. Taking the example of Bitcoin, its PoW system would take about 10 minutes to make a block addition to the blockchain. Due to that, the network is only able to manage about 7 transactions per second(TPS).
This is a severe disadvantage because in the traditional currency system, the number of transactions per seconds is in 1000s. A number of blockchains do offer a higher TPS and the networks are trying to come up with upgrades to eliminate this issue. Along with this, another issue is that of the capacity of the block as their data holding capacity is limited.
The growth of cryptocurrency in the global market has some drawbacks too. As you know cryptocurrency is decentralized and it makes no government interference, which leads to a never ending decentralized currency. In some regions people are experiencing issues due to regulations put forth by the government.
As anyone can be a part of the crypto world, it is a big concern for the government too. What the government can do here is that they can make Cryptocurrency illegal but this step will create chaos as many companies are running on crypto and a lot of people have a source of income because of it as well.
The other step the government can take is that they can become a part of the crypto world by investing or participating in the network. These issues are in daily talks now, many companies like Paypal are allowing cryptocurrency as a payment option.
It has been mentioned before that cryptocurrencies can be misused in illegal activities. The reason behind that is the way blockchains keep the identities of the users hidden. For the most part it makes the network very secure but as is the case with everything, some people find a way to misuse this technology.
Blockchains have been used in the past to do illegal drug trade and money laundering. People visit the dark web and trade things that are illegal and use cryptocurrencies to make the purchase.
The government regulations of some countries allow a certain loophole that these criminals exploit. Even though the amount of cryptocurrencies being used for this might not be huge, this is still a big issue.
Winding up the article, we hope you have ample amount of information on blockchain. We can totally understand how twisted the concept of blockchain is, still we tried our best to explain everything in a simpler way. If you want to add anything in the above topics feel free to express yourself.
If you want to understand something in detail, you can contact us or leave a comment below. Hope you like this article, we have planned more of these and they will be published soon. If you love these type of articles you can check out our website and if you want more to read in future, stay tuned with us!
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