Cryptocurrency All-in-One For Dummies. Peter Kent
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Название: Cryptocurrency All-in-One For Dummies

Автор: Peter Kent

Издательство: John Wiley & Sons Limited

Жанр: Личные финансы

Серия:

isbn: 9781119855828

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СКАЧАТЬ third evolution in blockchain technology, which is under active development, is addressing speed and data size constraints. Fixing these issues will enable blockchain technology to be used more realistically with mainstream applications. It will take several years before it is clear which structure will win out.

      Popular new developments include sharding, a type of database partitioning that separates large databases into smaller parts called data shards. An Ethereum development effort called fork choice rule splits the Ethereum blockchain into several parallel networks. This may allow Ethereum to scale more efficiently and reduce the congestion on the network, increasing transaction speeds and lowering transaction costs.

      A second popular scaling theory is called PoS (proof of stake). Broadly, PoS is the concept of putting up tokens or cryptocurrency as a bond for processing transactions. If the node is corrupted and does not process the transactions accurately, the node may forfeit their tokens or cryptocurrency.

      A third effort to scale blockchain technology utilizes trusted nodes. For example, the Factom network operates with federated nodes and an unlimited number of auditing nodes. These nodes are trusted with ensuring the system. Factom’s elected network is small, with just over 60 nodes. To hedge for security risks, Factom anchors itself into other distributed networks to piggyback on the security of more extensive systems. Factom also partitions its network into smaller, faster, more easily managed parts called chains. Factom has faster transaction speeds and lower transaction costs than PoW blockchains.

      Blockchains are powerful tools because they create honest systems that self-correct without the need of a third party to enforce the rules. They accomplish the enforcement of rules through their consensus algorithm.

      In the blockchain world, consensus is the process of developing an agreement among a group of commonly mistrusting shareholders. These are the full nodes on the network. The full nodes are validating transactions that are entered into the network to be recorded as part of the ledger.

Schematic illustration of how blockchains work.

      FIGURE 1-2: How blockchains work.

      Each blockchain has its own algorithms for creating agreement within its network on the entries being added. There are many different models for creating consensus because each blockchain is creating different kinds of entries. Some blockchains are trading value, others are storing data, and others are securing systems and contracts.

      Most blockchains operate under the premise that they will be attacked by outside forces or by users of the system. The expected threat and the degree of trust that the network has in the nodes that operate the blockchain will determine the type of consensus algorithm that they use to settle their ledger. For example, Bitcoin and Ethereum expect a very high degree of threat and use a strong consensus algorithm called proof of work. There is no trust in the network.

      On the other end of the spectrum, blockchains that are used to record financial transactions between known parties can use a lighter and faster consensus. Their need for high-speed transactions is more important. Proof of work is too slow and costly for them to operate because of the comparatively few participants within the network and the immediate finality needed for each transaction. They also do not need a token or cryptocurrency to incentivize transaction processing. So, they eliminate these components from their system, which enables them to run faster and cheaper than PoW systems. You can learn more about PoW and PoS algorithms in Book 6, Chapter 2.

      Thousands of blockchains and blockchain applications exist today. The whole world has become obsessed with the ideas of moving money faster, incorporating and governing in a distributed network, and building secure applications and hardware.

      You can see many of these public blockchains by going to a cryptocurrency exchange, which we explore further in Book 5, Chapter 3.

      Blockchains are moving beyond the trading value market and are being incorporated into all sorts of industries. Blockchains add a new trust layer that now makes working online secure in a way that was not possible beforehand.

Snapshot shows the altcoin exchange platform.

      FIGURE 1-3: The altcoin exchange platform.

      Current blockchain uses

      Most up-and-running blockchain applications revolve around moving money or other forms of value quickly and cheaply. This includes trading public company stock, paying employees in other countries, and exchanging one currency for another.

      Blockchains are also now being used as part of a software security stack. The U.S. Department of Homeland Security has been investigating blockchain software that secures Internet of Things (IoT) devices. The IoT world has the most to gain from this innovation, because it’s especially vulnerable to spoofing and other forms of hacking. IoT devices have also become more pervasive, and security has become more reliant on them. Hospital systems, self-driving cars, and safety systems are prime examples.

      Initial Coin Offerings (ICOs) are another exciting blockchain innovation. They’re a type of smart contract that allows the issuer to offer a token in exchange for investment funds. Often used as a non-dilutive fundraising option, entrepreneurs globally have raised billions of dollars. Governments and regulators have been quick to crack down on ICOs. The tokens may be unlicensed securities, and the offering may be defrauding investors. Nonetheless, the technology is impressive even if compliance issues are still being addressed.