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Blockchain, crypto and gateways explained

Blockchain, crypto and gateways explained

Published: 27 January 2022 • Reading time: 7 minutes

Blockchain technology and cryptocurrency that was built on it are among the hottest topics and biggest disruptors of the latest years in multiple areas: fintech, payments, IT, banking, fraud prevention, high-risk investments, gaming, supply chain and many others. We have already tackled the topic of blockchain and its prospects in digital payments arena. However, in this insight we would like to go into greater detail about the technology behind blockchain in simple words, how cryptocurrencies and blockchain payment gateways work and how they can impact the global Ecommerce market and Ecommerce payment processing.

How blockchain works and the structure at the base of it

So, what makes blockchain and blockchain payment gateways that receive and pass transactions so potentially revolutionary and secure, considering that the blockchain is decentralised, so there is no intermediary that backs you up and protects you from fraud? The answer is hashes, which are hash functions that are used to map data thanks to algorithms behind them. The clearest analogy for better understanding of hashes would be a simple diary, in which you recollect and list all the actions taken during the day, the diary is safe and under your control as long as in your possession. However, if someone with malicious intentions steals this diary, it would be very simple for that person to substitute one written action with another without changing the rest (e.g. from “Lent £1.000 to Michael” to “Lent £1.000 to George”).

Hashes are like this diary with blockchain payments and actions listed in a chronological order. With one difference: stealing and modifying one activity without a trace would be nearly impossible to do in blockchain thanks to hashing, changing just one character in your diary would convert it into a completely different hash from the beginning to the end (entirely different set of letters and numbers), which makes the blockchain payments completely traceable and unchangeable, due to the uniqueness of the hash, as well as cross-border payments in blockchain secure.

The blocks of the chain (each holds a reference to the previous one in the chain) are immutable, since the earliest blocks would need to be changed as well, just like in a genealogical tree. The smallest change of one piece of information in a genome would change completely the offspring’s DNA, the same concept applies to the blockchain technology. Especially, considering that all cryptocurrencies and transactions made with them are on millions of computers of the world and are completely transparent. Each user is unique but at the same time anonymous, and to change the blockchain of just 1 crypto coin, it would have to be changed simultaneously on at least 51% of these nodes, which is almost impossible nowadays for most common blockchains, and even if it happens, the stolen/hacked crypto can be tracked most of the time. Nodes are network’s stakeholders and their devices, where a copy of the distributed ledger is kept, they verify the validity of each succeeding block, and each node holds a unique identifier.

Another important concept to mention when talking about blockchain and cryptocurrency is a nonce, which is what makes hashes and blocks so efficient, secure and unique, it literally means “number only used once”, which is a “random” (or better, pseudo-random, since it only seems to be random) number added to a hashed/encrypted block, which makes the blockchain more secure and helps authenticate transactions and exchanges. The nonce number is what the crypto miners are solving for to be able to obtain the minable crypto.

Crypto miners, in turn, are the people who get crypto without purchasing it, but by solving complex math problems to add a block to the chain. Besides the fact that the problems are extremely complex, mining bitcoin, for instance, requires an enormous amount of electricity and an advanced hardware (an application-specific integrated circuit – ASIC), that is different from RAM chips or microprocessors, and is designed with the sole purpose of mining crypto. This circuit is precisely what consumes huge amounts of electricity. Because of the volatility of bitcoin, miners don’t know how much money they will make if they manage to add a block, which is rewarded with 6.25 bitcoins, but the reward amount is cut in half around every 4 years, and only 2 million bitcoins are left to mine. But there are many other cryptocurrencies that are mineable. Mining bitcoin, however, is becoming less profitable than a few years ago, and some countries ban mining crypto due to high energy consumption and power shortages, the EU is considering it as well in 2022 according to the latest news from Financial Times, Euronews and others.

Blockchain technology’s and crypto’s downsides

The first biggest downside to the blockchain technology, besides dubious or even criminal uses of such, which is already present in fiat currency, is a lack of human touch of intermediaries in blockchain, such as banks. So the funds can be sent to the wrong digital wallet, often non-existent, which is very easy to do by just mistaking one character for another, and no matter if the wrong receiver was real or not, the funds are non-recoverable and the receiver is unidentifiable. And there is no bank or any other intermediary to back you up and get your money back to you.

The second biggest downside is a possible loss of the PC or the wallet where the funds are stored, if the private keys weren’t backed up physically in a written form (not on cloud or in any other digital environment that can be hacked), no matter how much money there is, they are impossible to recover. In mid-2021, Chainalysis counted in their report “Key Players of the Cryptocurrency Ecosystem” that about 25% of all Bitcoins in the world are lost forever this way, 70% of which belonged to early investors and miners. Approximately 2/3 of all lost bitcoins is due to a loss of private keys, which makes the access impossible.

As for the last, there is also a mining concept of earning cryptos, we mentioned above, that uses an incredible amount of electrical energy and is impacting negatively the waste levels and is even being prohibited in some countries, and is becoming more challenging each passing day for casual miners that are not equipped with more than one PC at home. However, this topic is pretty controversial, since the decentralised nature of cryptocurrencies reduces level of electricity usage that would otherwise be used by intermediaries like in centralised financial institutions, so it might be considered evened out with the elevated electricity use for transactions and mining. There are also renewable sources of energy that can be used in crypto, but they are very hard to estimate due to various factors and little disclosure on the matter from miners. Hopefully, now the blockchain is explained, and became much clearer and simpler, as well as crypto, its prospects and downsides in the coming years.

Blockchain uses and Ecommerce

MINDSMITH’s research “Blockchain Revolution in Banks and Financial Institutions” in 2020 stated that multiple financial institutions invested in blockchain companies in as early as 2019, mostly banks, followed by insurance and financial security companies, as well as payments systems and fintech service providers.

According to Deloitte’s 2021 Global Blockchain Survey, blockchain technology is used worldwide in organisations with multiple scopes due to its transparency, mostly for the following:

  • secure information exchange (45%);
  • as a digital currency and identification (44%);
  • financial traceability (34%);
  • asset tokenization (32%);
  • product supply chain track (31%);
  • online payments processing and payment process flow (31%).

And there are many other uses, such as, for example, certification of origin of physical and digital goods, including NFTs, and public administration services, that we described in the insight on blockchain technology and digital payments.

But how can blockchain impact Ecommerce payment process, including cross-border payments, and a general payment process flow? Many new technologies are born from blockchain that are aimed at cutting the costs and intermediaries, such as public key certificates and blockchain payment gateways. The idea usually is a simple payment model that uses basic blockchain and cryptocurrency features (e.g. public key, private key, digital signature etc.). The development of such ideas is still at its origins, but is very promising for its users. There is, however, a concept of a blockchain payment gateway, mentioned earlier, even though it is still too early to deem it a stable system of payment crypto processing. Many of the existent blockchain payment gateways already integrate successfully with different Ecommerce platforms. But since it is at its origins, only a few Ecommerce companies accept crypto and a limited amount of payments companies allow for it, due to its volatility, among other reasons. Some companies choose to accept crypto payments manually and others try to automatise the processes using different platforms. Either way, payment systems are evolving and becoming ever so integrated, and surely, in 2022 digital payments, including blockchain payments, will bring about big news on the global market.

This content is published by Axerve without any claim of completeness or topicality of the information provided. This article has the sole purpose of providing useful information on the subject and is not to be considered an exhaustive guide but rather a vademecum. If you want to report a correction, please contact us via our social network pages.

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