By now you’d have to be living under a rock not to have heard of Bitcoin or any of the other emerging cryptocurrencies. They’re transforming the way people think of money, subverting the established financial order by creating their own form of financial legitimacy and making a lot of people who got in on the ground floor a few years ago very rich. Cryptocurrencies - of which Bitcoin is only one of more than 1,400 - have in just the past 18 months or so created nearly $1 trillion dollars in new wealth mostly out of thin air. It’s the kind of trick only the Fed is used to pulling off and as such this phenomenon, which stumbled out of the gate a few years ago, is suddenly being seen by some in government as a threat to the entire global financial order. “How is this possible?” Many people ask. And the answer is both simple and complex: blockchains.
A blockchain is a continuously expanding piece of Distributed Ledger Technology (DLT) that’s designed to manage electronic transactions without the need for a central administrator (i.e., accountant, bank or government). It exists solely in cyberspace and records cyber currency transactions between parties that don't know each other. Each block in the chain is a verified record of the most recent transactions, and all blocks are added to the chain is strict chronological order.
Every time a person buys some digital coins, sells them, transfers them or purchases something with them the ledger records the transaction and, once validated, it becomes part of the chain. As used today the blockchain is a virtually foolproof way to guarantee the integrity of virtual currency which would otherwise need a robust and well-recognized institution behind it to give it legitimacy.
No one in the early 1970s could have imagined the extent of the digital revolution that has swept over the world in the past decade. In hindsight, one could conclude that the rise of cryptocurrencies became a virtual inevitability in 1971 when the US government withdrew from the Bretton Woods agreement wherein US dollars had been convertible on demand to gold. Once currencies were detached from real-world assets, their value became subjective.
As a result, once computer technology reached a certain level of sophistication some began to ask "If governments can create virtual value why can't we?" All that was needed was a way to continually verify the integrity of a currency by continuous validation of transactions, and that's where blockchains come in. They represent the ongoing, verifiable, objective truth about the cryptocurrency which allows people to trade in the currency with a high degree of confidence in its value.
For cryptocurrency to remain viable, it's essential that participants aren't able to scam the system and spend their coins more than once. The way that is prevented is by making sure every transaction is verified and added to the blockchain.
People who conduct these validations are known as "miners," which is a somewhat misleading term.
A more accurate way to think of them would be as independent contractors who get paid a small amount of cryptocurrency for solving complex mathematical equations that validate successive transactions and help construct the chain.
"Mining" requires mind-boggling amounts of processing power that jack up energy bills and make mining unprofitable for those without a firm grasp of what they're doing. Still, it is a popular way to obtain virtual coins and competition among miners to validate transactions is intense.
One of the most appealing aspects of blockchain-driven cryptocurrencies is that no one can claim ownership. Blockchains like the one that underlies Bitcoin are open source which means anyone can access the data, verify transactions and even create hard forks in the chain that result in the creation of entirely new currencies.
While centralized exchanges will often ask for personal information before they let you join, decentralized exchanges have no such requirements.
As such you can enjoy a reasonable degree of anonymity using decentralized exchanges to conduct your crypto business.
That said true anonymity where no person or governmental agency would be able to trace a transaction back to a participant is extremely hard to come by. Hard, but not impossible because lately many cryptocurrencies calling themselves "privacy coins" have emerged promising to use such robust security protocols that tracing a sender or receiver will be essentially impossible.
If that sounds to you like something ISIS or other nefarious players might want to take advantage of congratulations; you and the government are thinking the same way. Because of this, you may see official efforts to outlaw such privacy coins in the near future.
A lot of people in the blockchain community have real concerns about the ability of the technology to handle vast numbers of participants. Currently, Bitcoin is estimated to have something in the neighborhood of 10-12 million users. Could the Bitcoin blockchain withstand 200 million users? 500 million? No one knows. And this uncertainty is just another dark cloud on the horizon of the crypto economy (along with potential regulation). Still, blockchain technology has proven itself both adaptable and dependable to this point. One would be foolish to think that innovation won't play a hand in making blockchains more efficient and easily scalable going forward.