Welcome everyone!
For those of you that know absolutely nothing about crypto, this is the perfect place to start.
Before we can dive into the different use cases of cryptocurrencies and blockchain, we must first understand the technology behind it.
So what is Blockchain Technology?
Blockchain originally began as a support system for one of the world’s largest cryptocurrencies, Bitcoin. Since its introduction users have been able to find various uses of the new technology to innovate and transform a wide variety of applications. Including:
Supply chain management
Digital Media Transfer (Sale of art)
Remote Services Delivery (Travel + Tourism)
Crowd Funding (Startup Fundraising)
Crowd Operations (Electronic Voting)
Identity Management (1 I.D. for various functions)
Distributed Resources (Power Generation + Distribution)
Distributed Intelligence (Education Credentialing)
Governing Public Records (Open Governing)
Platform for Decentralized Business Logic (Moving Computing to Data Sources)
Blockchain technology enables peer to peer transactions of digital assets without the need for intermediaries on a decentralized network (think of it as starting your own private bank where you hold the keys). Transactions are then recorded on an immutable distributed ledger to establish trust amongst your unknown peers.
Centralized V.S. Decentralized Network
To better understand the difference between centralized and decentralized networks, let’s imagine a U.S. consumer wants to purchase an item with his credit card in Spain; in order for the transaction to process there are various intermediaries involved. The transaction must first go through the CC Agency -> Customer Bank -> CC Bank -> Exchange -> Merchant Bank -> Merchant. This is a centralized structure, the current system in place today. On a peer to peer system, intermediaries shift to the periphery. This is a decentralized network. Transactions are done amongst peers without the need for intermediaries or institutions.
Centralized V.S. Decentralized
Since Blockchain technology can be a very new subject for many of you, you may be asking “well how am I supposed to trust peers that are unknown/anonymous?” This is where the beauty of an immutable ledger comes into play. In a public blockchain, transactions are stored and recorded on an immutable ledger. In order for a transaction to be recorded on the digital ledger, a consensus protocol is implemented to ensure the validity of a transaction. Nodes (computers on the network) reach an agreement that a transaction is valid and it is then added to the block. Nodes on the network are incentivized through a rewards system called ‘mining’ to verify the transactions to be recorded to the block. In return for validating and verifying transactions, they are rewarded in the native token of the blockchain (i.e. Bitcoin). Through this process all transactions are validated, verified, voted on, and then recorded on a digital ledger of blocks which creates a tamper proof record of the chain of blocks. This is the very heart and soul of blockchain technology and a decentralized system.
Basic Operations
All operations on a decentralized network are the responsibility of peer participants and their respective computational nodes. Participants have 2 major roles. Participants that initiate transfer of value by creating a transaction, and participants that pick on added work to:
Verify transactions
Broadcast transactions
Compete to claim the right to create a block
Reach consensus by validating a block
Broadcast new block
Confirm transactions
These participants are known as ‘miners’, they are the ones incentivized with the native currency of the blockchain to validate transactions. Invalid transactions are rejected and will not be broadcast. Valid transactions are added to a pool of transactions. Miners then select a set of transactions from the pool in order to create a new block. Miners on a blockchain compete by solving algorithmic puzzles for the right to start the next block (this is know as Proof-of-Work). Once a miner solves the puzzle, an announcement is made amongst other peers and the new block is broadcast. Participants then verify the new block, reach a consensus and the new block is added to the chain. A new set of transactions is then recorded and confirmed, and the cycle begins again.
Note: Consensus mechanisms will be covered in greater detail further down the line. For the sake of understanding the technology behind cryptocurrencies and the incredible potential it has to transform the world as we know it (this is currently happening), we will stick to the basics for now.
I hope you all enjoyed reading and are now (this much) closer to understanding crypto and the technology that drives it!!
Next post will be next Sunday and we will dive a little deeper into the blockchain structure and explore the elements involved. Hope to see you there!