The Technology Behind Bitcoin: The Background, Challenges and Regulations

While you might still be hard-pressed to pass someone on the street who truly understands Bitcoin and what it means for the financial world, you’re certainly likely to pass more than one who’s heard of it. In recent months, Bitcoin and its underlying technology is known as the blockchain have stormed the news with talk of incredible highs and risk of a crashing low.

However, while most of us will know Bitcoin as a new form of digital payments that we wish we’d invested in back with it was worth less than a dollar, the technology that fuels the currency is arguably where the true potential lies.

Here, we’re exploring blockchain in more depth from its background to the challenges and regulations associated with it – read on to find out more!

What Is Blockchain?

At its essence, Blockchain is a digital ledger designed to provide a safe platform for the making and recording of transactions. Whether those transactions are monetary or in the form of contracts and agreements depends on the cryptocurrency you’re working with, but as far as Bitcoin is concerned, this works as a history of monetary transactions.

What makes Blockchain so secure when compared to other methods of transactional recording is that it isn’t a centralized platform. In other words, this decentralized technology is hosted across a network of computers, making it pretty much impossible to hack without hacking every single computer or device individually; In blockchain’s case, this network consists of thousands of computers, mobile devices and more.

A Little Background Information

Blockchain’s creation and popularity can be put down to the introduction of Bitcoin into the digital world in January 2009. Founded by a person called Satoshi Nakamoto, which remains a fake identity for an anonymous person or persons to this day, Bitcoin was designed to offer users a method of payment that didn’t require any control from a central bank or authority, therefore making it possible to make anonymous, secure and extremely fast payments.

Through the use of blockchain, transactions can only be validated when every node – or member of the network – confirms that it is, in fact, a valid transaction. However, this technology has spread far from just monetary transactions.

The blockchain is used across a number of different cryptocurrencies and software, including the likes of Ethereum and Ripple that offer a valuable alternative to Bitcoin.

These ‘cryptocurrencies’ differ in that they work with smart contracts and have their own coins within their platforms. These coins are often used to pay for and finance these smart contracts securely to prevent any chance or fraud.

What Challenges Do Bitcoin And Blockchain Face?

When we come to spend money and complete transactions online, the one thing most of us have in mind at all times is security. With the complexity of the digital world comes a much higher need for better cybersecurity and blockchain has been designed with that security in mind.

However, even with the intricate security measures put into place that make blockchain practically unhackable, there have been plenty of examples of this security failing, not least the theft of around 440 bitcoins from a leading exchange firm in April 2018.

Whether there will ever be a perfect solution to cybersecurity in the future has yet to be seen, but blockchain certainly isn’t it just yet. It has vulnerable points from the size of any network, to the speed or efficiency of transactions.

The use of third-party systems can also play a risk to the overall security of the blockchain, and with the industry is still in its infancy, most are still learning who to trust.

Performance

The overall performance of blockchain currently depends on how big any one network is at any time. In short, the bigger the blockchain network, the more performance issues it could have as far as security and speed are concerned but the more secure it’s likely to be.

The balancing act of having optimal security on any network while also having near-instantaneous and efficient payments seems to be one that’s practically impossible to get right, but this could improve in the future with further development and understanding of the technology.

Adoption

Most blockchain-based technologies are still in their development stages and yes, that does include cryptocurrencies! The truth of the matter is that we just don’t understand it enough to use it at a particularly large scale with any confidence and so as a result, the adoption of cryptocurrencies and technologies is currently much lower than most blockchain-using companies would ideally like.

On a similar strain, even when consumers are investing in cryptocurrencies, there are still a limited number of places to spend them and even fewer uses on a B2C level.

Is There Any Regulation?

Because cryptocurrencies and the blockchain have been designed with decentralization in mind, regulation has been a tough subject to crack.

While most governments still have no regulation, some of the world’s most powerful countries are starting to adopt a regulatory stance on cryptocurrencies in regards to service and data privacy in particular. Here, we’re looking a little deeper.

Blockchain technology is starting to be adopted across a range of different vendors, but these vendors are likely to have their own performance regulations to cater to their own risk and reward levels.

As a result, consumers and businesses alike could be battling with countless different regulations that clash, or are difficult to keep up with. With an already limited service level whether you’re looking to pay with Bitcoin or another cryptocurrency, this complication could put people off of investing in cryptocurrencies or paying via this method completely.

Data Privacy

The biggest problem that governments and financial institutions are trying to tackle is the issue of data privacy and security. With blockchain, any data stored cannot be altered and this could have a potentially devastating effect on our data privacy when used wrongly.

While blockchain also allows for a level of anonymity, it’s also entirely transparent to anyone who looks for it and so while you may not be able to see anything more than a wallet code and transaction number (also known as a hash), this information is available for anyone to see. With GDPR coming into play this year and other data privacy and protection matters still in place, this is understandably providing a headache to regulators.

Jurisdiction Boundaries

However, there are still limitations for the jurisdiction that governing bodies can really have over cryptocurrencies and blockchain networks. Due to their decentralized nature, there’s very little that a government can do when it comes to trading or spending, especially through an off-shore based vendor or trading platform.

What’s more, a lot of blockchain networks are set up across a multitude of countries and so with more and more governments picking up their own regulations, these networks could find themselves having to follow and adhere to conflicting rules in some cases.

While a central regulation could eliminate this problem, the likelihood of this is very low and as a result, finding the right laws and rules remains an ongoing problem for financial and governing bodies alike.

The future of Bitcoin and blockchain technology is one that very few feel confident in predicting. With price volatility to consider and government regulations often remaining uncertain until they’re fully put into play, what we could face in the future is truly open to interpretation. With a better understanding of the blockchain, however, you could better navigate this future, so why not give it a try?