The rise of cryptocurrencies follows the invention of blockchain technology. Most cryptocurrencies are based on a blockchain that is designed to prevent fraud and keep digital assets secure. Blockchains are considered a secure network for running decentralized systems because they replace the fallible human factor with cryptographic measures and the human whims with game theory-driven decision-making processes.
While blockchain technology first gained attention as a digital asset infrastructure, it is now considered the most promising technology that came out of the cryptocurrency game. A blockchain, as people quickly realized, can be used to run and store all kinds of data, not just virtual currencies. Blockchain technology has many real-world use cases in areas such as supply chain management, the Internet of things (IoT), medical databases, and the insurance industry.
What Makes Blockchain Technology Secure?
Blockchain security rests on two legs: consensus and immutability. Consensus refers to how the nodes in a blockchain network agree on the version of data that is accepted as correct. It is achieved by a consensus mechanism—a cryptographic protocol that is known as the consensus algorithm.
Immutability refers to the permanency of records that are stored on the blockchain. If the blockchain is truly immutable, nobody can alter the previous data without everyone noticing what has happened. In terms of digital assets, immutability solves the problem of double-spending but it also allows for traceability and transparency in general.
Simply put, consensus protocols divide the responsibility of validating and verifying the data on the blockchain between the users, and thanks to the immutability of the records, the integrity of validated data remains safe.
Let’s look at how different blockchains provide security for digital assets.
Why Is the Bitcoin Blockchain Secure?
The Bitcoin blockchain is probably the earliest example of blockchain technology. The idea of a blockchain is described in the Bitcoin whitepaper, and the concept took concrete shape with the launch of Bitcoin.
The Bitcoin blockchain is designed as an open-source, public, and distributed ledger. In simple terms, it is composed of timestamped blocks of data, bound together by cryptography in chronological order. Each new block is added to the blockchain after a “mining” process that validates and verifies the block data.
As we mentioned above, blockchain security rises on immutability and consensus mechanisms provided by cryptography. In Bitcoin mining, the consensus mechanism in question is a proof-of-work algorithm. Each Bitcoin miner tries to come up with the lucky number that is necessary to validate a new block of transactions. This “number lottery” requires computational power, and the miner with more computing power has a better chance of coming up with the right number.
Each lucky number produces a unique cryptographic signature known as a hash. All blocks in the blockchain have a unique hash that is calculated using the previous block’s hash. This means that if someone tries to change the contents of a block by adding a false transaction, the block hash changes. While hashing itself takes a lot of computing power, verifying whether a hash is correct or not is simple since all users have a copy of the previous records. This makes the Bitcoin blockchain immutable and tamper-proof.
How Do Other Cryptocurrencies Use Blockchain Technology?
The code of the Bitcoin blockchain is public and anyone with programming experience can design a blockchain similar to Bitcoin’s. Most altcoins usually do just that. However, there are also cryptocurrencies with unique blockchains in the digital asset ecosystem. Perhaps the most interesting and well-known example is the Ethereum blockchain.
The Ethereum blockchain is a bit different from Bitcoin. While Ethereum also has its native currency—Ether—the blockchain is not just about the digital currency. Instead, Ethereum aspires to become a blockchain that can house decentralized applications (Dapps) on its infrastructure.
While Ethereum uses blockchain protocols similar to Bitcoin in order to ensure security, it has some important differences. Bitcoin is a rather compact system; mining protocols interlace the proof-of-work algorithm with the hashing function in order to secure the Bitcoin network. With Ethereum, cybersecurity gets more complicated due to blockchain applications and smart contracts.
Since third-party blockchain applications and smart contracts can be written on top of the Ethereum blockchain code, any vulnerabilities inherent in these third-party contracts pose a security threat to the Ethereum blockchain. While these blockchain applications have many use cases, from decentralized financial services to healthcare, each application can be used to exploit Ethereum’s data security if there is a problem with its code. This is why the Ethereum platform independently reviews each new application’s code before adding it to the Ethereum ecosystem.
Another security measure most cryptocurrencies—including Bitcoin and Ethereum—use is public-key cryptography. This is how users on the blockchain network are able to interact with the blockchain in order to manage their funds. Public key cryptography assigns a unique private key to each user that can be used for the authentication of digital asset ownership. Each private key works like a digital signature. A user who loses their private key can not engage with the blockchain or control their funds.
What Are the Different Kinds of Blockchains?
The examples we used until now were all public blockchains. While most cryptocurrencies use public blockchains, there are also private blockchains used for cryptocurrencies and other businesses.
Private and public blockchains are different in terms of how the security of the blockchain network is managed. Public blockchains like Bitcoin and Ethereum depend on consensus protocols for decentralized security. This means that there is no single point of failure in the network since each node can be replaced by another.
Private blockchain systems have internal monitors and access control features that ensure only trusted parties can interact with the blockchain. A central authority has the power to manage the network, which can be more suitable for certain businesses. However, a central authority often constitutes a single point of failure, which can make the entire network more vulnerable to cybersecurity breaches and denial of service attacks.
A Few Words Before You Go…
Blockchains (or distributed ledger technologies) are used for storing all kinds of data, including cryptocurrencies. They have become popular over the past years due to the increased transparency, traceability, and security features that they offer. Blockchain technology depends on cryptography to provide security. However, it is important to remember that security is always context-dependent. Different blockchains have different levels of security depending on what the blockchain is used for and there is no one-size-fits-all solution when it comes to designing security measures for a blockchain.