Cryptocurrencies are on everyone’s lips. The most common buzzwords are probably “bitcoin” and “blockchain”. One reads and hears about unbelievable increases in value; but also about ups and downs in the value of cryptocurrencies, which are being brought into play as an asset class by more and more players in the financial sector and are being considered as a thoroughly serious investment alternative.
The reasons for this lie in the revolutionary properties of blockchain technology, which makes payment transactions not only fast but also secure because it does not allow any manipulation.
Payment with cryptocurrencies takes place in the same way as handing over cash directly between payer and payee – namely without any intermediary financial institution. Virtual money is based on a finite amount of money that is defined in the code of the respective cryptocurrency. This makes cryptocurrencies a finite resource. No government or bank can simply reprint money as is the case with conventional so-called fiat currencies (The term fiat money comes from the Latin word fiat “Let it be done! Let it be done! Let it be! ” and refers to an economic object without intrinsic value that serves as a medium of exchange).
All of the above-mentioned properties result from the characteristics of blockchain technology. This can do much more than “just” manage cryptocurrencies.
The blockchain is, roughly speaking, a counter-design to cloud services. The data of a blockchain is not “centrally” located on the server of a data centre room (which can be attacked and hacked), but is distributed over thousands of computers that are networked with each other. With its decentralised nature, blockchain technology represents a counter-design to the global financial system. In addition to its importance for cryptocurrencies, the blockchain opens up the perspective for a multitude of applications in which it is of central importance to permanently store large and dynamically growing amounts of data in a tamper-proof way. Therefore, as an innovative information technology, the blockchain has the potential to revolutionise many business models.
But what exactly is a blockchain? What exactly is a cryptocurrency? If you try to fill this knowledge gap and research on the internet, you will find sentences like this: “Cryptocurrencies are divided into three categories: Payment Tokens, Security or Asset Tokens and Utility Tokens.” Aha! You only understand “station?” You are not alone there. Many “explanations” themselves contain terms that you don’t understand and which themselves require explanation. Let’s get to the bottom of this systematically.
The operating principle of the blockchain A blockchain is the encrypted “chaining” of data “blocks”. It is a decentralised data technology that documents so-called transactions in a forgery-proof and unmanipulable way and makes them traceable.
Transactions can be any kind of information. The transactions in a blockchain are not limited to financial transactions. The blockchain can be used for any kind of information. Every unit of information has its fixed place in the blockchain and is documented in an immovable and forever unchangeable and forgery-proof way through the encrypted architecture. But how exactly is this possible?
The blockchain is structured like a cash book To illustrate this, let’s stay with one of the most prominent uses of the blockchain, cryptocurrency. Transactions here are payment transactions. Like in a cash book, it is recorded when and in which sequence payments were made or received by whom. All transactions are verifiably transparent for everyone. With one exception: it is not possible to see to which persons the transactions are assigned. Thus, a cryptocurrency is transparent and at the same time pseudo-anonymous.
The construction principle of the blockchain
- The blockchain consists of chronologically chained data units in blocks that contain the transactions of a certain period of time.
- Each transaction is provided with a timestamp. This means that you know exactly when the transaction took place.
- Each block receives a lock that immovably locks it to a place in the chain. This lock is the so-called “hash”. This is the encrypted fingerprint of a block that must always match its predecessor.
- A single block cannot be deleted because otherwise the hashes will no longer fit. Because: if the data block changes, then the hash also changes automatically and they no longer fit together.
- Each new data block is always added to the end of the chain: This creates a continuous ledger that cannot be interrupted, changed or deleted.
Decentrality is the central characteristic of the blockchain A blockchain is a decentralised distributed system. It is distributed on many computers within the blockchain computer network (nodes) and stored as a copy on each individual computer. If a new block is added, it must also be accepted in each copy in the network. This makes a blockchain extremely secure. It is unlikely that someone could hack, i.e. manipulate, all these computers.
Verification and trust – redefined In a blockchain, every transaction is witnessed by thousands of witnesses in the form of node computers (nodes). The verification principle: Only if more than half of all “witnesses” (i.e. node computers) confirm the transaction, it is considered validated and is entered by all nodes on the blockchain and is thus airtight and traceable.
Once this is done, the transaction can no longer be reversed. Hacking the computer network is impossible. A transaction documented in the blockchain is therefore 100% trustworthy.
The combination of the internet and blockchain thus represents a milestone in information technology: The internet has changed the way we communicate with each other. The blockchain is changing the way we trust each other.
What can you do with blockchain technology? We are very familiar with the exchange of information via the internet. We communicate directly from sender to receiver. When we make a money transfer, we can hand someone money notes directly (“physically”) or transfer the amount virtually via online banking. In doing so, we take a diversion via a bank where we can initiate and receive payments. We monitor this when we check the account balance at our bank.
In contrast, blockchain technology allows us to transfer value electronically, directly over the internet, without the need for an intermediary bank.
The blockchain enables the automation of payment transactions If we can manage payment transactions among ourselves in a direct way, we can logically also transfer payment means to machines or devices, such as parking meters, automobiles, etc. But devices or machines can also make payment transactions among themselves. For example, a car could autonomously pay a parking ticket directly. If transfers can be made without intermediary institutions, transaction fees will also be reduced as a result.
The payment method without intermediary banks and their fee models could thus provide access to financial services for millions of people who live away from any financial infrastructure.
Blockchain technology is ideally suited for securing, documenting and proving transactions of information (not only means of payment) in an immovable and unmanipulable way. Data storage is distributed across a large number of networked computers.
The blockchain opens up the perspective of new digital business models In addition to pure payment solutions, property transfers can be carried out. Administrative processes such as land register or commercial register entries as well as trustee services should also be mentioned here. Democratic elections become unmanipulable, and many applications are conceivable in the business field of insurance. In general, blockchain technology enables a number of innovative business models – e.g.
- Mapping of values (tokenisation)
- Automation – such as automatically executing contracts (smart contracts)
- Crowd Funding
- Digital ID (identification of persons)
- Data backup in logistics