What is Blockchain and its future?
As the name suggests block chain is the chain of blocks meaning it’s a continuously growing list of records in the form of chain where each block refers to its previous block using the concept called as cryptography. Each block contains the cryptographic function known as hash function and transaction details along with the time stamp. These details are irreversible and cannot be manipulated. This kind of storage of transaction details is known as distributed ledger. It is the only technology which solves the issue of double spending with minimal cost. Double spending is a fraudulent technique of spending the same amount twice.
A distributed ledger (also called a shared ledger, or referred to as distributed ledger technology) is a consensus of replicated, shared, and synchronised digital data geographically spread across multiple sites, countries, or institutions. There is no central administrator or centralised data storage.
Hence everyone on this peer to peer network shares the updated copy of each transaction data. Blockchain is the only of its kind a data structure who have distributed ledger. It’s an example of distributed computing system with highest ever tolerance.
The use of a blockchain removes the characteristic of infinite reproducibility from a digital asset. It confirms that each unit of value was transferred only once, solving the long-standing problem of double spending. Blockchains have been described as a value-exchange protocol. This blockchain-based exchange of value can be completed more quickly, more safely and more cheaply than with traditional systems.
Blockchain was invented by Satoshi Nakamoto in 2018 to implement first Cyrptocurrency – Bitcoin. We will see Bitcoin in detail in another article.
As a distributed ledger, Blockchain reduces the costs involved in verifying transactions, and by removing the need for trusted “third-parties” such as banks to complete transactions, the technology also lowers the cost of networking, therefore allowing several applications.
Starting with a strong focus on financial applications, Blockchain technology is extending to activities including decentralized applications and collaborative organizations that eliminate a middleman. Blockchain have good future in numerous sectors like Real estate, Food Delivery, Medical, Identity and security sectors etc.
However, it will take decades to get Blockchain involved into day to day life of common people.
What is Bitcoin ?
Bitcoin is a very first implementation of the technology known as Blockchain, Bitcoin is a digital token of exchange between two parties without any intermediary. It does not have any physical existence but it exists virtually. There is a technology in place, a distributed network that maintains the process of Bitcoin exchange and the ledger of Bitcoin balances and its holders. So these digital tokens and the system which enables the exchange of these tokens is combinedly referred as Bitcoin – The digital currency.
As of now bitcoin is used as a digital currency in the countries where Bitcoin is legally accepted, It is also traded on specific crypto-exchanges where you can buy and sell bitcoin as a traded entity unlike we trade stocks on exchanges.
How can I buy Bitcoin ?
You can buy Bitcoin online in the exchange of money on any trusted exchange or wallet. In India also have its own few exchanges where you can buy Bitcoin using INR by following some simple steps.
We are not promoting any specific exchange here but below are few well know exchanges in India to buy Bitcoins –
Zebpay, Koinex.in, Unocoin, Coinsecure are some famous Indian exchanges to buy BTC with INR, You just have to login there and follow a process to verify your KYC documents and account number. Once done you will be able to buy and sell the bitcoins. We will be coming soon with the steps to buy Bitcoin article soon.
These are some world famous foreign exchanges – Binance, Bitfinex, Bittrex, Kukoin, Cryptopia, IQoption where you CAN NOT easily buy bitcoin using INR immediately but surely transfer them here from your Indian wallet/exchange and use it for trading. As they are foreign exchanges their KYC verification process is much complex and time taking as compared to Indian exchanges.
You can open the account at any suitable exchange to buy bitcoins whichever has the lower buy rate.These foreign exchanges are very good for trading purpose as thousands of other coins are listed there for trading purpose.
Note- Never invest in crypto market more than you can afford to lose as cryptocurrency market is volatile and prices can fluctuate very frequently.
How Bitcoins are produced ? What is Mining?
Bitcoin is believed to be invented by a person or a group of people named Satoshi Nakamoto. Bitcoins are generated electronically using some specific combination of hardware and software, for a while call them as nodes. The process is called as bitcoin mining. When any bitcoin transaction happens between two parties, it is verified by some trusted network nodes through the use of cryptography and logged in a distributed ledger. This verification process results into the generation of bitcoin as a reward to the nodes who first verifies the transactions.
The first exceptional and un-spendable block of 50 bitcoins known as Block 0 was mined by the system to initiate the circulation of bitcoins, these are the only bitcoins which are mined NOT as a reward of transaction verification, however after these 50 BTC every smallest fraction of bitcoin was mined as per the system protocol . Total number of bitcoin supply is limited by the system up to 21,000,000 BTC and as of now appx. 17,000,000 BTC are circulated all over the world. You cannot print bitcoins unlike any other authorized currencies like Dollars, rupee and Euros etc.
What are Altcoins?
Every other Cryptocurrency which is not Bitcoin is known as Altcoin. Ethereum, Ripple, Cardano, BitcoinCash, LiteCoin, Stellar, Neo and thousands of all other coins are the examples of Altcoins. As BTC was invented with its own and have its own distributed ledger and set of protocols that enables the functioning of Bitcoin as a system, all the Altcoins have their own distributed ledger and set of protocols which are likely to be different from each other for its functioning. But the fundamentals of most of the Altcoins are same as that of Bitcoin.
These set of protocols include the way transactions are verified, interest charge on stored coins and coin mining rules. These all vary for all the Altcoins which are results of forks from Bitcoin or the totally new Altcoin built from the scratch.
In recent days Altcoins are mainly used for crowd funding and a trading entity on crypto exchanges. Many countries where Cryptocurrency is a legal tender few of the Altcoins along with Bitcoin like Litecoin, Ethereum etc are now legally used as a token of exchange against any goods or services.
What are Forks?
In Crypto-world software upgrade is know as ‘Fork’, Fork is nothing but changing the way Blockchain of a particular coin operates. Forks are necessary for technically improving and updating the Cryptocurrency for its long run. These are of two types –
- ‘Hard fork’ – Here the developers community of Blockchain impose the hard fork, so they change the rules of the existing Blockchain that the coin operates and either fork off from original coin or create a altogether new Cryptocurrency. Here all the nodes and miners on the system have to upgrade the software.
- ‘Soft fork’ – This is another type of fork where no physical split happens but the existing Blockchain protocol is changed and accepted by all the nodes. Here only miners have to upgrade the software but nodes will not have to do this as they can process the old as well as new blocks being backward compatible.
Ethereum classic forked from Ethereum, BitcoinCash forked from Bitcoin etc. are the good examples of forks.
What is a cryptocurrency wallet?
A cryptocurrency wallet is a digital wallet that you can use to store, send and receive various cryptocurrencies. The wallet doesn’t exactly “store” your money as a real-world wallet does. Instead, it saves your public and private keys which in turn helps you send and receive money.
What are public and private keys?
Let’s think of a real world situation before we understand what public and private keys are. Imagine a vending machine. Can anyone and put their money inside the machine right? But, they can’t take out the money because they don’t have the key, they can only put money in the machine. The only person who can take out the money is the owner of the machine who has the key.
In this example, the vending machine is the public address which anyone uses to send money to you. You are the machine owner, and the key that he is carrying is your private key. Using this private key only you can access your money and do what you please with it.
The public key is the address that anyone can use to send you the money, while the private key is what you will use to send money to anyone else. Remember, ONLY you should know what your private key is, otherwise anyone can use your wallet to send your money to any other addresses.
Under no circumstances should you ever lose your private key. Let’s put this in super simple terms. If you lose your private key, then you are SCREWED (yes, uppercase has been used to emphasize the gravity of the situation). You should use at least two different techniques to save and store your private keys. We will discuss these various techniques a little later in the article.
As of right now, let’s discuss the two methods of storage that you can use to store your cryptos, hot storage, and cold storage.
Hot Storage Vs Cold Storage
Let’s understand the basic distinction between the two with a real-world example. Hot storage is like the wallets that you carry around in your pocket. The Cold storage is somewhat akin to your savings bank account. Keep this distinction in mind as we move forward. If you want to use your currency frequently then you must use hot storage. On the other hand, if you want to store your money for a long time then you must use cold storage.
Hot storage, in simple terms, is when you keep your cryptocurrency in a device which is directly connected to the internet. This connection is what makes a device “hot”.
You should think of exchange wallets, desktop clients, and mobile wallets (any wallet that exists on a device that will ever connect to the internet) as a hot wallet. It’s easy to access funds on a hot wallet, and if you live somewhere that accepts cryptos for micropayments, there’s nothing wrong with using one for day-to-day spending. Think of it like fiat (government issued) currency. You might walk around with a portion of your wealth in a wallet for convenience but the majority you keep secured away. Your hot wallet should behave in the same way as a real-world wallet. You use it to carry a small amount of cash for ease of access. That is all.
While transacting with hot wallets is very simple, there is a huge drawback when it comes to them. They are easily hackable. The whole crypto-space has been gaining a lot of value recently and where there’s value, crime is never far behind. Recent ransomware attacks and previous compromises of large exchanges should be sufficient beacons to newcomers.
Even though you’ll not be storing a great deal of value on your hot wallet, it’s vital that you follow the backup steps within the restoration section of your wallet to avoid losing funds through human error. With your private key, and seed phrase intact, you should be able to restore any wallet painlessly enough.
Pros of hot storage
- Quick to access funds.
- A wide number of options, and support for different devices.
- User-friendly UIs make sending and receiving simple.
Cons of hot storage
- Exposed to cybercrime. Sophisticated hackers, ransomware, and other malicious actors are a constant threat.
- Damaging the device could destroy the wallet. Without carefully backing up private keys, and seed words you could permanently lose your cryptocurrency investment.
- You could still lose/damage/have stolen the restoration details.
Now let’s explore the different kinds of hot storage wallets that you can use.
Online Wallets aka Cloud Wallet
These wallets are the easiest to use among all. The creation is super simple because it’s basically creating your own account on any of the exchange services. Furthermore, you can access this wallet from any server or any device in the world as long as it is connected to the net. Having said that, there is one big problem when it comes to online wallets. Your private key is going to be saved on another server. This is basically like serving up your key to hackers on a silver platter. Do NOT use online wallets to store huge amounts of your money. Store the bare minimum that you need for exchange purposes.
Desktop or mobile wallets are also popular choices for a hot wallet. These represent a much better option in terms of security. Desktop wallets are downloaded and installed on a single PC or laptop and they are only accessible from that one device where it was downloaded. While it is a safer alternative than an online wallet, it can still be very inconvenient because you will not get access to your money unless you are on the device from which you downloaded the wallet. MultiBit and Armory are great examples of desktop wallets.
Mobile wallets are pretty convenient to use because all you need to do is to download an app into your phone. MyCelium is a really popular app(for both Android and iPhone) that people use for their mobile wallets, CoPay is a great option as well.
The real problem with desktop/mobile wallets are the dangers associated with virus attacks. A hacker can easily put Trojans in your system to phish for your details. Apart from that, you can easily lose your cryptos if your desktop or mobile is damaged.
The easiest way of understanding how a multi-signature (multi-sig) wallet works like is by thinking of a safe which needs multiple keys to operate. A multi-signature wallet is great for 2 purposes:
- To create more security for your wallet and save yourself from human error.
- To create a more democratic wallet which can be used by one or more people.
How does multi-signature wallet save you from human error? Let’s take the example of BitGo, one of the premier multi-sig wallet service providers in the world. They issue 3 private keys. One is held by the company itself, one is held by the user and the third one is a backup that the user can keep for themselves or give to someone trustworthy for safe keeping To do any sort of transaction in a BitGo wallet you will need at least 2/3 keys to operate. So even if you have a hacker behind you, it will super difficult for them to get their hands on 2 private keys. And on top of that, even if you lose your private key for whatever reason, you still have that backup key that you had given to your friend.
Now, how does a multi-signature wallet create a more democratic environment? Imagine that you are working in a company with 10 people and you need 8 approvals in order to make a transaction. Using a software like Electrum you can simply create a custom multi-sig wallet with 10 keys. This way you can make seamless democratic transactions in your company.
Even with all its amazing features, at the end of the day, a multi-signature wallet is still a hot wallet so you must use it economically. The Bitfinex hack (more on it in a bit) happened despite the fact that it had multi-signature security. Plus, at the end of the day, the company whose wallet you are using still has one of the private keys. It completely depends on their ethics as to what they can do or not do to your funds.
Risks of Hot Storage
Different hot wallets carry different security risks. The least secure are undoubtedly those hosted on Exchange sites. Leaving your currency where you bought it might seem like a great idea because “if it starts to crash, I can change it back to dollars quickly”. In reality, all you’re doing by leaving cryptos on an exchange is trusting an unlicensed entity with your money. They hold your private keys, and they ward off daily attacks. In the past, they’ve even succumbed to such threats. Exchanges are a huge target for criminals because they store a lot of value. If you’re day trading, this risk is part of the deal. If you’re holding long-term, you want to avoid it all together.
The Bitfinex hack is a great example of the dangers of hot storage. In early August 2016, the folks at Bitfinex noticed that several of their security measures were being compromised. Before long, over $72 million worth of BTC had been stolen by a hacker. It was so bad that the value of BTC fell 20% within a day:
So what do you do to your cryptocurrency to keep it safe from malicious attacks like this? You use cold storage. Let’s find out what that is all about.
When you keep your currency in a device which is completely offline it’s called cold storage. For those seeking the most secure form of storage, cold wallets are the way to go. These are best suited to long-term holders, who don’t require access to their coins for months, or years at a time.
They aren’t without their own set of risks but if you follow the instructions correctly, and take every precaution possible, these are greatly minimized. Given the amount of attention that cryptocurrency has been receiving over the last few years, it has unfortunately piqued the interest of attackers. In the light of that, it’s a far more secure option to use cold storage as means of storing your money.
San Francisco-based bitcoin wallet and exchange service CoinBase holds up 97% of its coin reserves in hardware and paper wallets. What are hardware and paper wallets? You will get to know about it in a minute. For now, let’s check out the pros and cons of cold storage:
Pros of Cold Storage:
- A great place to hold large amounts of coin for a long period of time.
- Provides a safety net against hackers and people with malicious intent since it is completely offline.
Cons of Cold Storage
- It is still susceptible to external damage, theft and general human carelessness.
- It is not ideal for quick and daily transactions.
- Setting it up can be a little intimidating for beginners.
Now that we have seen both the pros and cons let’s take a look some cold storage wallets that you can use to store your coins
Hardware wallets are physical devices where you can store your cryptocurrency. They come in a few forms but the most common is the USB stick style typified by the Nano Ledger series. Although many swear by them, hardware wallets are still prone to compromise. Firstly, you’re trusting that the company who made your wallet hasn’t logged all the private keys with a plan to raid wallets in the future. This applies to those bought from the company themselves, but particularly if a hardware wallet has been acquired second hand. Under no circumstances should anyone ever use a pre-owned hardware wallet.
Although loss or damage can spell disaster for the unprepared, hardware wallets can be restored. Therefore, it’s just as important to back up your hardware wallet, as it is your online hot wallets. You should keep restoration details in a safe place that only you, and anyone you plan to leave the money to know about. Remember, your restoration details open the wallet. Think very carefully about who (if anyone) you share them with. It’s also vitally important that you transfer all coins to a new wallet, should something unfortunate happen between you and anyone else who knows your private keys (spouse, etc.)
Here are some hardware wallets that you can use:
- Ledger Nano S.
Without a doubt, the safest way to store any cryptocurrency is using a paper wallet. By following a few pointers below, you can set one up entirely for free. This truly makes you the master of your investment, and if precautions are followed, there’s no possibility of your private keys being known by anyone else. Of course, this means that keeping a record of them is even more important. Losing private keys means you’ll forfeit the entire contents of your paper wallet (but then again, that’s true for every wallet out there.)
What is a paper wallet?
To keep it very simple, paper wallets are an offline cold storage method of saving cryptocurrency. It includes printing out your public and private keys on a piece of paper which you then store and save in a secure place. The keys are printed in the form of QR codes which you can scan in the future for all your transactions. The reason why it is so safe is that it gives complete control to you, the user. You do not need to worry about the well-being of a piece of hardware, nor do you have to worry about hackers or any piece of malware. You just need to take care of a piece of paper.
Do you need a paper wallet?
The answer to this question will largely depend on your circumstances. If you plan to spend the summer day trading a few coins, perhaps you don’t. Alternatively, if you’re in for the long haul, and don’t intend to touch any portion of your stash, then a paper wallet is the most secure option available to you.
Setting up a paper wallet - Bitcoin?
Paper wallets are formed by using a program to randomly generate a public and private key. The keys will be unique, and the program that generates them is open source. Those with advanced knowledge of coding can check the backend of the program themselves for randomicity in results. What’s more, we’ll be generating our keys offline. This eradicates the exposure to online threats, and deleting the simple program after use will destroy any trace of them.
Don’t worry if it sounds confusing, it’s not. You’ll need no specific knowledge of coding, or encryption. All you do need is a computer, an internet connection, something to record your keys on.
Anyway, let’s create our paper wallet. Follow these steps:
- Ensure your computer is entirely free from any form of malicious software. A brand-new computer would be ideal but is often not feasible.
- Visit the page WalletGenerator.net
- Download the zip file by clicking here:
- Once downloaded open the “index.html” file but before that make sure that your internet is off. This entire process is done to make sure that your wallet is hacker free.
- Now it is time to generate your wallet. Keep hovering over the highlighted text and it will generate more characters. Or if you want, you can manually type in random characters. Just keep doing it until the counter goes to “0”.
- The moment the count goes to zero your wallet will be generated.
- Print the page or make multiple copies of the numbers from it. (Important: Ensure printer is not connected to Wi-Fi at this point).