Blockchain Technology and How It Relates to Virtual Currencies


This is the second article in a blog series about virtual currencies.  In the last article, we discussed the rise of virtual currencies and cryptocurrencies.  We discussed the advantages and disadvantages of cryptocurrencies and how they differ from traditional currencies.  In this article, we focus on virtual currencies and blockchain technology.

Virtual Currencies and Blockchain Technology

For those unfamiliar with virtual currencies, blockchains as a concept must also be explained.  Blockchains validate the coins that make up the cryptocurrency.  Blockchains are records that continuously grow.  They are linked and secured using cryptography.  Each block, record, contains a hash pointer that links to a previous block, a timestamp, and transaction data.  This is also referred to as "hashing," which basically makes the data appear to be simply a line of random characters.  The characters vary depending on the encoding method, and the adjustment of one letter in a chain would represent a totally different blockchain.

Securing Virtual Currency through Blockchain Technology

Another appeal of blockchain technology is that, by their nature, blockchains are innately resistant to modification.  Blockchains are typically managed by peer-to-peer networks that adhere to a specific protocol that validates the entry of new blocks. Once recorded and entered into the ledger, the data cannot be altered.  If any block is to be altered, subsequent blocks must also then be altered, which requires cooperation by the majority of the community.  Blockchains are also considered secure by innate design due to their high Byzantine fault tolerance.  This allows for the solving of the double spending problem without the need of a trusted regulatory figure or central server.

The term block time is also often used in conjunction with cryptocurrency because holders must know the average time it takes the currency network to generate a new block in the block chain.  The block time can vary from anywhere from seconds to days.  Block time also generally occurs with some sort of transaction, which then in turn, means that a currency that has shorter block time has naturally faster transactions.

Virtual Currency Transaction Using Blockchain Technology

Once a party requests a transaction, the requested transactions are pushed into the peer-to-peer network and then broadcast to unique computers that are also known as nodes.  These nodes that receive the request for a transaction then validate that specific transaction using an algorithm unique to the cryptocurrency.  Transactions that are approved are then entered into the public ledger and represented as blocks.  Then, once that newly-created block is created, it is added to the already existing chain of blocks, and the transactions are considered complete.  These blocks are also permanent.

Blockchain Implementation

Large companies like IBM, Intel, and Microsoft are all beginning to use blockchain technology as software tools to conduct business.  Some startup companies have also begun using the technology to provide more secure digital ledgers for information like voter id, graphics rendering, insurance, and welfare payments.  Overall, a true understanding of blockchain technology is not necessary to trade in or own virtual currency.

It is important, however, to recognize the rising importance and prevalence of blockchain technology in today's digital world.

More from this series: The Rise of Cryptocurrency The Perils of Cryptocurrency and Blockchain Technology The Intersection of Cryptocurrency and Intellectual Property Law

For more information on this topic, please visit our Internet & eCommerce service page, which is part of our Internet & eCommerce Practice.

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