All cryptocurrencies run on blockchain technology. If you are considering making a long- term investment in a cryptocurrency, we recommend that you try to get a basic understanding of blockchain technology, as well as the technology platform that your chosen cryptocurrency runs on. Even if you are only interested in short-term speculation or trading and not long- term investing, it’s a good idea to understand the basics of how blockchain technology works. Blockchain technology is an encrypted, decentralized, peer-to-peer database. Its strength lies in the fact it is decentralized. For example, let’s say that a stock exchange has a single database of all the owners of every piece of stock traded, which is continuously updated. The database is stored in a single physical location, on one server. What if the database is hacked, destroyed, or otherwise corrupted by a computer virus or act of nature? Of course, the database would probably be backed up in at least one other location, but it is still relatively vulnerable, and can be easily tampered with. Blockchains, though, are decentralized peer to peer databases, where the content files are broken up, encrypted, and stored differentially on thousands of nodes all over the world that communicate with each other to produce a seamless whole. This makes fraud or hacking extremely difficult, because changes to the transaction and ownership records must be agreed by a majority of all the pieces (blocks) to become valid. This is the reason why cryptocurrency transactions take some time to process, because any changes to the publicly distributed “ledger” must be agreed upon and verified everywhere. Th is solves the “double spending” problem that would naturally plague any digital currency. There is no sole authority or central server to be manipulated.
- Spring '16