The world of digital assets is growing and changing rapidly.

Retailers, investors, and corporate and bank management are increasingly asking questions about this industry - and for good reason!
At the time of writing, the crypto market has a total market cap of over $2 trillion USD and the number of crypto wallets has exploded to over 260 million.

It is clear that there is retail and institutional interest in the crypto sector, but the infrastructure and operational support models for digital assets are different from traditional finance, and it is important to understand these differences before making the transition.
Mercury Iconex services are here to help with this transition and our online academy is here to support you in creating the building blocks of digital asset knowledge by shedding light on the fundamental layers of how digital assets are built and work, what the market looks like, who the players are, how the capital markets work, and how to think about the impact it could have on you.

So in this article, we’ll cover the basics of blockchain, what blockchain is, how it works, and what you need to know about public and private keys.

What is Blockchain Technology?

Blockchain technology is the foundation of the entire digital asset ecosystem. Everything within the digital asset ecosystem is built on a blockchain.
The blockchain is simply a distributed (decentralized) ledger of transactions that is cryptographically secured, immutable (=fraud-proof), and highly resilient. In other words, it’s a trusted bookkeeper that keeps track of transactions between people in a fair and secure way. It’s designed to be super reliable and resistant to change. Think of it as a helpful online bookkeeper that makes sure everything is recorded accurately.
The blockchain itself is actually a linked chain of blocks of validated transaction data. Each block contains a series of validated transactions, and within that block there is a link back to the previous block. This means that there is a link (hence the -chain- in blockchain) back to every block and transaction ever made. This makes everything recorded on the blockchain traceable.

Distributed ledger!

An interesting feature of blockchains is that they are distributed and decentralized. This means that there is no single central server, set of computers, or third party that owns the only copy of the blockchain. So there are multiple distributed computers that are collectively accessible to each other and multiple market participants. As such, each participant in the blockchain (called a node) has its own copy of the ledger.



Decentralized System: DeFi (left): Has multiple interconnected nodes that are connected to each other in a more distributed manner, with each node maintaining a copy of the ledger without a central point, enabling and ensuring more robust, distributed, and resilient communication, control, and governance across the network.

Centralized System: CeFi (right): Has a central hub (node) that is connected to all other nodes and users. The central node is the single point of control and communication, with which all users (nodes) interact for transactions and data management.

How does Blockchain work in simple terms?

Transactions: When someone makes a transaction with Bitcoin, it is sent to the network of computers ( nodes).
Validation: Computers on the network (known as miners) validate the transaction by solving complex mathematical problems. This process is known as mining.

Block formation: Once a transaction is validated, it is grouped together with others into a “block”.
Each block is added to the chain of previous blocks, creating a chronological order of transactions - hence the name “blockchain**”.
Security: The blockchain is secured using cryptography, making it extremely difficult for anyone to change past transactions.

This has two major benefits:

Resilience

Because blockchains are decentralized, there is no single point of failure, which means that blockchains tend to be very resilient.

Immovable / Tamper-Resistant

Because blockchains are decentralized and there is no “Single Point of Failure”, it is nearly impossible for a malicious actor to get into the system and alter transaction history (e.g. changing the $1 million USD transfer of Bitcoin to “ABC Corporation” to “Malicious Actor, Inc.”). If a malicious actor wanted to do this, they would need to find a way to alter a majority of the copies of the blockchain before the next block is added.

New blocks can be added every 2-10 minutes, depending on which Blockchain protocol you are using and transacting on.

This would be extremely difficult to achieve. Once a transaction is added to the blockchain (e.g. Tony sends 1 Bitcoin to John), that transaction is irreversible. If Tony sends that 1 Bitcoin to the wrong person or address and it gets added to the blockchain, that 1 Bitcoin is gone forever. This is of course very different from how traditional financial market transactions are currently handled.

How do the transactions work?

Imagine Tony decides to buy 1 Bitcoin. This transaction is bundled into a block, and institutions (or individuals) called "Miners" then go and solve a very difficult but logical mathematical puzzle. Whoever solves the puzzle first gets to add the block to the blockchain and gets a prize.

Usually the payment is in the form of the token they are mining or get paid a transaction fee).

The other "Miners" in the network then come together and validate that this is the next block to be added, and once consensus is reached - 51% of the nodes in the blockchain network must agree that this next block should be added to the blockchain - the block is added to the blockchain and all nodes now have an updated copy of that block, so this process can continue indefinitely and sequentially.

Tamper resistance has been discussed before, but to delve a bit deeper into this in terms of reaching consensus, consider the following scenario. If a “Malicious Actor A” wanted to change Tony’s Bitcoin purchase address so that the purchase transaction goes to “Malicious Actor A” instead of Tony, they would need to change the address on 51% of all nodes in the blockchain network before the next block is added. In a truly decentralized and scaled blockchain protocol, this is nearly impossible to accomplish.

Types of Blockchains!

Public: This is a blockchain that is open and accessible to everyone. The most popular public blockchains are the Bitcoin and Ethereum blockchains.

Private: This is a members-only blockchain (only members of the network or an organization can open, read, and mine transactions). An example of this is "Quorum" from the internationally recognized bank "JPMorgan Chase".

The type of blockchain network you want to use depends on your use case and other requirements. Currently, public blockchains are the most popular form of blockchains used by institutions.

What are keys and why are they important?

Public and private keys are the most important things you need when it comes to digital asset transactions. They are the building blocks for digital asset transactions. Public and private keys are a string of characters (numbers and letters) that are randomly (and cryptographically) generated and nearly impossible to replicate. Your private key is the foundation for security and your public key is derived from it.

The concept of keys comes from the cryptographic side of blockchain. Without getting too technical, to make transactions or interact with digital assets you need three basic things namely:
Private Key: Your private keys allow you to initiate and verify transactions to access the digital assets you have stored on the blockchain in your digital wallet.
Public Key: Your public key is essentially the address that people send transactions to - every transaction can be traced back to a public key.
Digital Wallet / Ewallet: Your digital wallet contains both your public and private keys and has what is called a wallet address. The blockchain wallet concept is not much different than your traditional physical wallet where you store valuables like cash, credit cards, ID cards etc. and use them to make transactions. So a digital asset wallet is quite similar to a physical wallet, but with a lock on it

Below is a very simplistic metaphor for how public keys, private keys and wallets work!

Think of your digital wallet as a treasure chest that resides on a blockchain. Your wallet address for receiving or sending digital assets is similar to your physical mail or email address. So it is the destination that transactions are sent to and from and your private key is the key that opens your treasure chest and allows digital assets to move around. If you want to buy digital assets on the market, you use your private key to open the treasure chest for the exchange of the assets.

Due to the monetary value involved in institutional level blockchain transactions, having secure private keys is extremely important. If a malicious party were to gain possession of your private key, they could access your aforementioned treasury and initiate and verify transactions on your behalf. If you lose your private key, the assets in your treasury are essentially inaccessible until you recover your key. Fortunately, there are many ways to secure the management of your private keys.

When you deposit money into a bank, it is stored at the bank itself. If you are a fund manager and buy stock, the shares or stock certificates are typically held at a qualified custodian. With digital assets, the assets themselves are not stored at a bank or held at a custodian. If you own 30 Bitcoins, there is no physical place where your Bitcoin is. Your Bitcoins live and are stored in your treasury on the blockchain.

What are digital wallets and storage?

There are three basic types of digital wallets that can store your private keys:
Hot Wallets: These are wallets that live on your web browser, or are powered by applications and require authentication to access, such as Mercury Iconex.
Cold Wallets: Also called cold storage, or paper wallets, these wallets live on non-internet connected devices, such as a disconnected Ledger USB stick.

Mercury Iconex uses Cold Storage capabilities to store users’ digital assets responsibly and securely!

Updated on: 14/12/2024