- Blockchain is a secure digital database made up of chains of blocks of data.
- In cryptocurrency trading, blockchain technology is a decentralised digital ledger that is not controlled by one individual or party.
- Traders can participate within the network anonymously or pseudonymously.
- As a technology, Blockchain is transparent and secure, making it a popular choice in other sectors, such as retail, healthcare, and real estate.
What is Blockchain?
At its core, Blockchain is a secure electronic database made up of blocks of data chained together in chronological order. This means that new data always enters a fresh block until it is filled, and then it is chained onto the previous block. There are two main types of blockchain systems, public and private, and the main difference between them lies in how users participate in the network and how the blockchain is managed. Public blockchains are decentralised and not controlled by a single authority, and anyone who wishes to participate in the network can do so. Though nobody can change data, it can be accessed by everybody. On the other hand, private blockchains are gated and can be controlled by a single authority, meaning that users cannot access them without being granted entry. Usually, they are used in organisations and enterprises as internal databases.
Blockchain and cryptocurrency trading
Blockchain technology has been taking the Internet and the trading world by storm since its first application in 2008. In fact, these days, it is probably most widely used as a digital ledger for cryptocurrency transactions. First implemented by an anonymous individual or entity under the pseudonym Satoshi Nakamoto, these digital ledgers are public and made up of a network of participants worldwide. Although they are vehicles for cryptocurrency trading, their operations are not influenced by governments or central banks. Traders are also granted a relatively high degree of privacy as they participate in the network either anonymously or pseudonymously.
How do cryptocurrency transactions take place?
Cryptocurrency transactions, which is the buying and selling of cryptocurrencies, take place within blockchains as follows:
Request and authentication
Transactions are first requested and authenticated. Authentication is usually done through cryptographic keys that securely confirm the identity of the user making the request. You may think of it as a password, which allows the user to access their wallet. Each user has a public key and a private key. The public key is visible to all the participants in the network, while the private key is only privy to the user. Upon authentication with both keys, a block that represents the transaction is created.
Network authorisation
The block is then sent to the network of participants for authorisation. They validate the transaction and receive a reward for it, usually in the form of cryptocurrency. This validation process is also called Proof of Work¸, and it requires participants to solve a complex mathematical problem. When they solve the problem, they are also said to be mining, and participants are also known as miners.
Blockchain update
Authorised, the block can be added to the existing blockchain. This update occurs instantaneously across the network and becomes visible to all participants. As soon as the chain has been updated, the transaction is considered complete, and its details can no longer be updated or edited by anyone.
Is trading with blockchain technology safe?
Blockchain technology has been so talked about because it presents a safe and secure way to create and trade digital currency. This has not always been possible in the past due to trust issues from users. Below we will run through some traits of Blockchain to explain why it has been such a big success:
Distributed ledger
Firstly, blockchains are decentralised. With the use of Distributed Ledger Technology (DLT), no single user has the ability to exert full control over the database. This prevents anyone from creating millions of digital tokens for themselves or intercepting transactions.
Immutable records
All records within the blockchain are immutable. This means they cannot be changed once they are entered into the database. This gives users peace of mind in that their digital tokens are safe, and transactions cannot be tampered with.
Emphasis on transparency
Not only are transactions time-stamped to create extra clarity for all users involved, but every participant within the network has a copy of the digital ledger for viewing at all times. When a new transaction enters the database, they are recorded identically across the board, and all transactions—past and present—can be viewed at any time.
Encrypted transactions
Last but not least, all transactions recorded on the database are individually end-to-end encrypted and validated before being added to the blockchain. This is done through a method called hashing. Hashing is when original data, also known as an input, is transformed through a specific algorithm into an alphanumeric string of a fixed size, also known as a hash. This process is one-way, and the original data will only be retrieved through decryption. Hashes of transactions are unique. Thus, they are easily identifiable by participants within the network, making it impossible for transactions to be faked. This prevents issues like fraud and deceit.
Other ways blockchain technology is used
Blockchain technology is perhaps most recognised for its use concerning cryptocurrency storing and trading. However, as an electronic database, it serves many purposes across different sectors, from healthcare to real estate. It has also become popular throughout the years as the world strives for eco-consciousness and works to eliminate paper trails. Below are some ways in which both public and private blockchains are used every day.
Record keeping
As a blockchain is an electronic database, it is used in medical and business record-keeping. This includes the monitoring of inventory and supply chains, from the stages of production to quality control, keeping track of products that are shipped from place to place. It can also be used in medical recordkeeping in healthcare facilities for increased patient privacy and convenience.
Loyalty programmes
The retail experience can also be enhanced with blockchain technology. Customers who join loyalty programmes of their favourite shops can be rewarded with tokens that can be dispensed and stored within a blockchain. This is a safe and secure way to keep customer data, and shops will also incentivise them to remain loyal and shop again.
Title transfers
Blockchain technology can also be used in title transfers across sectors. Whether it be buying and selling a car, a house, or land, the transferral of titles can be done securely and presents a fraud-free and transparent way of making transactions.
Data backup
As blockchain technology is a secure database that is much more immune to hackers than cloud technology, it is a perfect way to back up either regular or sensitive data. The bottom line Blockchain technology is not only used for cryptocurrency trading; it plays a vital part within it. Safe and secure, it has quickly become a trusted way of digital trading. For traders who are looking for privacy, they can participate anonymously or pseudonymously as well. Here at Rakuten Securities Australia, we offer BTC/USD (Bitcoin/US dollar) trading. Open a free demo account today to practise making trades before going live.