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What Is Blockchain Consensus Algorithm?  

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What Is Blockchain Consensus Algorithm

Blockchain technology has many different moving parts. Hence, to operate smoothly, the architecture must be properly designed. An important piece of Nakamoto’s architectural design is the use of a consensus algorithm. 

Blockchain Consensus Algorithm in a Nutshell

In its simplest format, a blockchain consensus algorithm is a decision-making process. It is designed to assist in reaching a common decision by a group of people. Of course, in this particular scenario, the consensus algorithm involves blockchain-related solutions.

How Does it Work?

Let’s assume that 20 co-workers are asked to collaborate and offer a recommendation on a specific project. Each participant in the group will reach a decision that will provide the greatest individual benefit. The group must listen to each recommendation and decide which of them will provide the greatest overall benefit. The final recommendation must be accepted by all group members regardless of whether it offers the best solution for each individual.

Let’s assume that 20 co-workers are asked to collaborate and offer a recommendation on a specific project. Each participant in the group will reach a decision that will provide the greatest individual benefit. The group must listen to each recommendation and decide which of them will provide the greatest overall benefit. The final recommendation must be accepted by all group members regardless of whether it offers the best solution for each individual.

Suggested Read: Luxury Fashion Brands Are Entering The Crypto Space (cryptobite.io)

Brief Summary of Blockchain Consensus Algorithm

  • An important piece of blockchain architecture is the use of a consensus algorithm.
  • It is a decision-making process that helps a group of people to make a common decision.
  • The consensus algorithm always produces the optimum solution for the overall group.
  • A consensus algorithm helps to create fairness and equality in a decentralized ecosystem.
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Blockchain and Artificial Intelligence

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Artificial intelligence (AI) was introduced in 1955 by John McCarthy

Artificial intelligence (AI) is the ability of a computer program to think, learn and mimic human thought. Introduced in 1955 by John McCarthy, artificial intelligence has several different fields of study. These fields include computer science, mathematics, psychology, and philosophy, among many others. AI is linked to several different use cases. The most prominent use cases include machine learning, supply chain optimization, speech recognition, self-driving cars, and manufacturing optimization.

Now we know a bit about AI, let’s review a few examples of how AI is improving decentralized networks like blockchain.

Cryptocurrency Trading

During the past few years, artificial intelligence has substantially increased its presence in the area of crypto trading. This is particularly true with high-frequency trading (HFT). Essentially, HFT is a type of algorithmic financial trading characterized by high speeds and high turnover rates. High-frequency trading is a perfect vehicle for cryptocurrency trading because the crypto universe has several different exchanges.

HFT uses artificial intelligence to analyze multiple technical indicators across various exchanges in an effort to take advantage of market opportunities. AI is still in its infancy stage in regard to crypto trading. Going forward, artificial intelligence will play a pivotal role within the crypto trading community. These are commonly known as trading bots.

Suggested Read: What Are Public, Private, and Consortium Blockchains? – Cryptobite

Blockchain Security

Unfortunately, industries that find themselves in a hyper-growth phase are more susceptible to cyberattacks and malware. Without question, blockchain technology, along with digital assets, is currently experiencing an explosive rate of growth. Consequently, the blockchain industry has endured an exponential increase in malware, phishing, fraud, and digital theft. Based on data provided by industry experts, $9 million is lost to cryptocurrency scams on a daily basis.

The key to successfully thwarting a blockchain hack is to identify the threat and understand the nature of the attack as quickly as possible. Hackers are acutely aware that they must strike quickly in order to launch a profitable attack. Unfortunately, crypto exchanges have a poor track record in preventing cyber-attacks. AI-based cybersecurity systems are designed to detect a hack in real-time and dramatically increase the likelihood of stopping the attack. AI systems are far superior to traditional cybersecurity systems because AI has the ability to detect patterns from previous attacks. This information can be used to prevent future cyber threats.

Bitcoin Mining

As you know, all crypto transactions are verified and added to the blockchain by Bitcoin miners to maintain the integrity of the network. In exchange for their work, miners are rewarded with Bitcoin. Crypto mining requires energy consumption and computing power. Over the past few years, Bitcoin miners have explored the idea of using artificial intelligence to reduce energy waste and computing power to reduce costs.

A few of the largest mining companies have created AI-based systems, allowing companies to share power and increase profitability. AI algorithms have made crypto mining faster, more profitable, and more efficient. Without question, artificial intelligence will continue to play an essential role throughout the crypto industry.

Brief Summary of Blockchain and Artificial Intelligence

Artificial intelligence (AI) was introduced in 1955 by John McCarthy

  • AI is the ability of a computer program to think, learn and mimic human thought.
  • AI encompasses several different fields of study.
  • AI has increased its presence in cryptocurrency trading.
  • High-frequency trading uses AI to analyze technical indicators across many exchanges.
  • AI-based cybersecurity systems are designed to detect a hack in real-time.
  • Bitcoin miners use AI to reduce energy consumption and computing power.
  • A few of the largest mining companies have created AI-based ecosystems.
  • AI algorithms have made crypto mining faster, more profitable, and more efficient.
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What Is Lightning Network?

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what is the lightning network

The Lightning Network is a solution designed to solve the problem of transaction speed on the Bitcoin blockchain. It was introduced in a white paper by Joseph Poon and Thaddeus Dryja in February 2015.

Problems With Bitcoin

When Bitcoin was launched in January 2009, transaction speed was not a major concern. In fact, for the first eight years of its existence, it operated quite well. As Bitcoin entered a raging bull market in 2017, it became abundantly clear that transaction speed was becoming a major detriment to the long-term sustainability of the crypto network.

Some experts believe that Nakamoto poorly designed the process for validating transactions on the blockchain network.

As we discussed in previous sections of Blockademy, a consensus algorithm known as proof of work (PoW) is used to validate Bitcoin transactions. Unfortunately, PoW can be a slow and cumbersome process. The transaction processing capacity is limited in terms of size and frequency.

The average block creation time is 10 minutes, and the block size is limited to 1 megabyte. Therefore, the average time to process a transaction on the network is three to seven seconds.

Lightning Network Solution

Lightning Network was never intended to replace PoW. It is used to reduce the burden on the Bitcoin blockchain. The key ingredient of the Lightning Network is the fact that all transactions occur off-chain.

It operates on top of the Bitcoin blockchain known as a ‘layer 2’ protocol. By adding another layer to the blockchain, it enables users to create payment channels between any two parties. These payment channels have no expiry, allowing both parties to conduct multiple transactions.

When all activity between the two parties completes, the information is transferred to the main network. All transactions between the two parties are recorded as a single transaction on the Bitcoin blockchain for efficiency.

A large portion of the Bitcoin community has never endorsed the Lightning Network because transactions occur outside of the main blockchain. They argue that decentralization is being compromised each time a transaction is conducted off-chain.

Even though the Lightning Network has not been well received by the entire Bitcoin community, it holds a great deal of promise in terms of solving Bitcoin’s scalability problem. Therefore, the network will continue to play an important role in managing Bitcoin’s ever-increasing volume of transactions.

Brief Summary of Lightning Network

  • Lightning Network is designed to solve the problem of Bitcoin transaction speed.
  • It was introduced by Joseph Poon and Thaddeus Dryja in February 2015.
  • In 2017, transaction speed became detrimental to the long-term viability of BTC.
  • Lightning Network removed some of the burden from the Bitcoin blockchain.
  • All transactions on the Lightning Network occur off-chain.
  • The transactions occur outside of the Bitcoin blockchain network.
  • The Lightning Network is known as a ‘layer 2’ protocol.
  • Many Bitcoiners believe that the Lightning Network reduces decentralization.
  • They argue that off-chain transactions compromise decentralization.
  • Overall, the Lightning Network is still very popular within the Bitcoin community.
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Bitcoin Use Cases

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bitcoin uses

Bitcoin was launched on January 3, 2009, when Satoshi Nakamoto mined 50 Bitcoin. Over the course of the past decade, several use cases have emerged for this now-famous cryptocurrency.

Before we examine some of the most common uses for Bitcoin, let’s review the actual meaning of a use case. How does it apply to Bitcoin and why is it such an important topic in the technology universe?

What is a Use Case?

Without use cases, there would be absolutely no reason to continue discussing Bitcoin or the entire cryptocurrency ecosystem. This is because the main purpose of discovery or technological innovation is to add value to our daily lives. Discoveries are created to enhance the well-being of society. Without some type of societal benefit, a discovery will lose its appeal very quickly. Even cryptocurrencies.

The official definition of a use case is an engineering term that describes how an individual uses a system to accomplish a goal. In simple terms, a use case is a measuring stick for determining the true value of a new product or service. So, what can Bitcoin be used for?

Elimination of Intermediaries

Arguably, Bitcoin is the most revolutionary discovery in the history of money. It can completely alter the way consumers and businesses interact with financial institutions.

BTC allows you to send and receive money without the use of a bank, credit union, or credit card company. It eliminates the role of a bank in a financial transaction.

Technically speaking, a bank is nothing more than an intermediary. It serves as the middleman between customers and their money. While not true for Bitcoin, cryptocurrency overall can remove all intermediaries.

The elimination of intermediaries would extend well beyond the financial services industry. The global economy is filled with intermediaries across all industries. Removing intermediaries would lead to savings as well as create a surge in productivity.

Tokenization of Assets

Tokenization involves fixing an asset to a token. These assets include such things as stocks, bonds, commodities, real estate, fine art, antiques, precious metals, etc. In fact, any type of asset involving a buyer and seller could be tokenized.

You may be wondering how does Bitcoin become part of the tokenization process? Removing financial assets from the legacy financial system would involve the elimination of the US Dollar as the payment mechanism between the buyer and seller. Therefore, a new payment system is needed to settle all transactions. Bitcoin is a perfect replacement because it is linked to a public blockchain, which is one of the necessary ingredients for successful tokenization.

Financial assets are a multi-trillion-dollar business for the financial services industry. Therefore, using Bitcoin as the payment mechanism in the tokenization process would save an incredible amount of money for investors. Tokenizing all asset classes will allow more people to invest in these products because it will lower the cost and remove barriers to entry.

Store of Value

Store of value is arguably the most important function of an asset. As you know, there are many assets within the global financial system. However, very few of these assets can serve as a store of value.

Many people believe the US Dollar is an excellent store of value because it has remained relatively stable over the past few hundred years. On the surface, this is a true statement. The US Dollar is a stable currency in terms of volatility. The Dollar rarely fluctuates more than 10% per year against a basket of foreign currencies.

However, over an extended time, the Dollar has proven to be a poor store of value. In fact, the Dollar has declined in value 43.3% since 1985.

If we measure the Dollar against the rate of inflation (purchasing power), it fails miserably as a store of value. Because the loss of purchasing power occurs so slowly people simply don’t realize it is happening. Purchasing power is a difficult concept for many people to understand as well which means that this downside to the US Dollar often goes unnoticed.

Inflation

Concerning fiat money, the major concern among currency experts and professional economists is the fact that governments (through the use of central banks) can create an unlimited amount of money. Basic economics teaches us that increasing the supply of any good or service will ultimately decrease the underlying value of the good or service. The same economic laws apply to money.

This explains why the US Dollar has lost a tremendous amount of purchasing power over the past several decades.

Inflation is inherently built into all fiat money systems because (as mentioned) governments have the ability to print unlimited quantities of money. As the supply of money increases, its underlying value decreases. As long as the US Dollar is based on a fiat money system, the value of the currency will continue to erode. In other words, the dollar bills in your wallet or bank account will continuously purchase a smaller amount of goods and services over time.

Fiat Currencies

There have been over 3,000 fiat currencies throughout recorded history. The first fiat paper currency was used in 960 AD by the Chinese. The average lifespan of each currency is less than 30 years. The currencies in existence today will eventually fail. This includes the US Dollar.

In fact, the US Dollar (in its current fiat format) has lasted much longer than 30 years. Officially, the US Dollar became 100% fiat in August 1971, when Richard Nixon eliminated the Gold Standard. Therefore, the US Dollar has survived for 50 years, 20 years longer than the average currency.

Don’t panic though the US Dollar could easily maintain its current format for another few decades. But eventually, it will be replaced by another currency system. This explains why so many currency experts, economists, and investment professionals are fascinated by Bitcoin. Many people believe that Bitcoin will ultimately replace the entire global fiat currency system. This would include the Australian Dollar, British Pound, Canadian Dollar, Euro, Japanese Yen, Mexican Peso, Swiss Franc, US Dollar, and all other global currencies.

Role of Bitcoin (and Cryptocurrency)

As you can see, fiat currencies are a terrible store of value because they are constantly printed into circulation. All G20 nations create an unlimited supply of currency units through their central banks. Bitcoin is completely different because the supply is limited. When Satoshi Nakamoto unveiled Bitcoin in the 2008 white paper, it was revealed that Nakamoto limited the supply of Bitcoin to 21 million. Arguably, this is the most important feature of Bitcoin.

Unlike fiat money, it’s impossible to increase the circulating supply above 21 million.

Cross Border Remittance

As we discussed in a previous section of Blockademy, approximately 1.7 billion people are unable to obtain basic financial services. These services include transferring funds across borders to friends and family members. Unfortunately, the legacy financial services industry has done little to change the basic structure of its own industry because there is no financial incentive to make these changes. This is particularly true with cross-border remittance.

Cross-border remittances involve payments where the payee and the recipient are located in different countries. These types of transactions are generally very expensive because the payments involve foreign currency fees. It’s not uncommon for fees to exceed 10% of the transfer amount.

The vast majority of cross-border transactions occur within the unbanked population. Based on the fact that the unbanked have very little access to basic financial services, the vast majority of cross-border remittances occur outside of the banking industry. Instead, these transactions are conducted through money transfer agents (MTA) such as Western Union, MoneyGram, and TransferWise.

The majority of the unbanked population resides in Africa. Mobile phone usage is quite common throughout the African continent. As a result, an increasing number of workers are using Bitcoin wallets to transfer funds to friends and family members. The fees are much less expensive compared to money transfer agents. This is another example of how a decentralized payment network is adding value to the lives of people across the globe.

Brief Summary of Bitcoin Use Cases

  • A use case is a measuring stick for determining the value of a new product or service.
  • Without legitimate use cases, new products and services are basically worthless.
  • The number of use cases for Bitcoin continues to expand.
  • Bitcoin can eliminate intermediaries, tokenize assets, and be used as a store of value and for cross-border remittance.
  • Unbanked consumers are big users of Bitcoin when sending money across borders.
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