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What is blockchain?
Blockchain is a new technology with far-reaching applications that can annihilate banking services, if not banks altogether, and redesign transactions across a multitude of businesses and industries. It is a digital ledger that records transactions publicly or privately, and sequentially. It can facilitate peer-to-peer transactions, eliminating or reducing the need for middlemen. Through encryption and decentralization, blockchain creates trust. With Bitcoin’s blockchain, anyone can see all transactions.
How does blockchain work?
Blockchain and how it works defines how Bitcoin works. It is a digital ledger that stores every single transaction. If I sell a pair of shoes to you for $10, that transaction can be engraved on a digital ledger that is immutable. The ledger is not owned by a bank or any centralized database. It is decentralized, which means it is hosted by a network of computers across the world. Some of the computers belong to large groups and some of the computers belong to individuals. Transactions on a blockchain occur through and are recorded by addresses. Each sender and recipient requires an address.
Is there only one blockchain?
No, there are several different blockchains. Ethereum is its own blockchain. Other cryptocurrency development teams are working on their own blockchains. IBM has its own blockchain. Bitcoin is the oldest and longest blockchain, containing the greatest number of transactions.
The History of the Blockchain
1991 – First work on blockchain-like concept occurred
The first mention of any sort of blockchain-like technology dates back to 1991, when Stuart Haber and W. Scott Stornetta did the first work on a secured chain of blocks.
1992 – Blockchain-like technology improved by incorporating Merkle trees
The next year, 1992, saw the introduction of Merkle Trees to blockchain-like design which enabled multiple documents to be stored in a single block, increasing blockchain efficiency.
2002 – Decentralized trust within a network system was conceptualized
Ten years later, in 2002, the concept of decentralized trust within a network file system was formulated by David Mazieres and Dennis Shasha.
2005 – Bitgold was proposed: A Blockchain-like system with Proof of Work
In 2005, Nick Szabo proposed Bitgold: a protocol for decentralized property titles that incorporated a blockchain-like system.
This protocol involved Proof-of-Work and timestamping features. Unfortunately, BitGold had one fatal weakness.
It was discovered that someone who held a balance of BitGold could spend their coins twice without being “caught” – this weakness became known as the “double-spending problem.”
2014 – Blockchain innovation gathered attention
The years following Bitcoin’s release saw it gain tremendous popularity and use.
It became seen as a legitimate method of payment – in fact, it was the only one that could be used for certain purposes (like donating to WikiLeaks).
From 2009 to present, we’ve seen huge increases in file sizes on blockchains, innovations that change the way they work, and booms in the prices of cryptocurrencies using blockchain technology.
2014 – Blockchain 2.0: Decentralized Apps and Smart Contracts were conceptualized
In 2014, the term Blockchain 2.0 was first used in The Economist magazine.
Blockchain 2.0 refers to the emergence of applications that can be executed on a blockchain. This innovation represented a massive step forward in blockchain technology.
With this concept, the prospect of running Decentralized Apps (apps that have their code distributed amongst a decentralized network of users rather than stored by a centralized authority) on a blockchain became a possibility and Smart Contracts became plausible, as well.
2015 – Ethereum launched as the first cryptocurrency using Blockchain 2.0
The very next year, 2015, saw the launch of the first Blockchain 2.0. Vitalik Buterin, a contributor during Bitcoin’s creation, saw room for improvement over Bitcoin and wrote the code for Ethereum.
Ethereum promises to provide the same functionality as Bitcoin but will also feature the ability to run Decentralized Apps.
2017 – Initial Coin Offerings and blockchain-based projects became common
While new blockchain-based projects have been appearing since investors and innovators started focusing on blockchain technology in 2014, 2017 was a year marked by an explosion in blockchain-based platforms.
Initial Coin Offerings, also known as ICOs, in which early investors are given the chance to buy the first shares of a project became extremely common in 2017.
Blockchain technology is currently disrupting, or it will disrupt any industry that involves data and transactions.
This includes economic sectors involving intermediaries that monetizes trust, think bureaucracy in financial companies and even the governments.
From here, our blockchain for dummies guide will dive into each of the aspects we just touched upon more in-depth. From the benefits of the blockchain to the problems it solves, including some more advanced concepts.
If you don’t really care about the technicalities of blockchain and its interaction with cryptocurrencies, skip and read the chapters relating to the benefits of Blockchain Technology.
How Do Blockchains Work
The term “Miner” is ever-evolving and each blockchain has unique specifications for the word.
To keep it simple, we are going to refer to miners as individuals or companies running special software to build onto the Bitcoin blockchain.
Miners are essential to make the blockchain operational, without them, there would be no computers running the network and no way to conduct transactions with it.
To incentivize miners, rewards are usually given to the computer which finds the next block in a public and open-source chain, like Bitcoin’s blockchain. The rewards are generally distributed through cryptocurrencies.
Each block within a blockchain holds some data. In the case of Bitcoin, data is a series of transactions. That data is organized in a single digital folder.
This folder – the block in this case – is confirmed by a miner, who adds it to the previous block in the blockchain.
New blocks of transactions are written into Bitcoin’s blockchain every few minutes. This is called “mining” blocks. This action links the new blocks to the already existing chain of blocks.
But in order to be added to the existing chain of blocks, new blocks need to be validated.
This is the role of nodes. In the case of Bitcoin, nodes are in charge of validating Bitcoin transactions that occur across Bitcoin’s network.
The way this works is that miners choose which transactions to include in a new block.
Next, nodes verify all the transactions in the block. Lastly, if everything is good, nodes relay the new block to other nodes.
Every blockchain is based upon a protocol (or “consensus algorithm”). A protocol is an agreed-upon method of interaction between computers. You can think of this like the rules each machine within the network must follow.
For example, Bitcoin has some specific rules which keep the protocol standard across all machines:
The blockchain’s software is run by individual computers connected to each other via the internet from all over the world.
Each computer in a blockchain is running the same software. If one is disconnected, the network stays operational.
Even if every computer in the world shuts down simultaneously, the blockchain is still storing its data in distributed ledgers.
If all of the world’s power goes out, computers will have a copy of the ledger from when it was last updated. We wouldn’t be able to update the ledger until power was restored, But BTC wont disappear.
In order to maintain transaction history over time, copies of all the blocks are distributed amongst the participants of a blockchain.
These participants are called nodes. Miners build the blockchain by mining blocks, but anyone can act as a node.
Nodes run the blockchain’s software and continually update themselves with the most recent blockchain information.
There are different types of nodes:
Hosting a node helps keep the blockchain updated and accurate.
Nodes and miners are constantly cross-referencing each other in order to build and maintain the blockchain.
When information is kept on multiple machines it is known as Distributed Ledger Technology. Blockchain is one of the most well-known examples of this technology.
A good example of a real-world situation is your bank. In order to record all the money being deposited and withdrawn, the institution itself keeps a centralized ledger.
You are paying them for this service, it’s one of the major reasons banks were invented. It’s also a costly investment which requires physical infrastructure and professionals working around the clock to keep it operational.
The decentralized way in how blockchain works is in contrast with traditional banks.
The blockchain is hosted by everyone in the system, foregoing the need for an expensive headquarters. Compared to a centralized system, it has no weak points and it’s more cost effective.
Recall the previous chapters of this blockchain for dummies guide.
Did we mention the importance of miners? Yes, we did. But we didn’t explain it into much detail.
Miners use CPU power and electricity to validate the next block in the Bitcoin blockchain.
Using primary resources such as electricity and computing power to validate blocks is called “Proof of Work”
This real-world cost is what makes the Bitcoin protocol so robust. Every block within the chain is unique – think of it as a tangible digital asset.
The more miners hosting a network, the stronger it is.
Compare Bitcoin, which has the largest miner network of any Cryptocurrency. to a brand-new blockchain that’s just being launched.
This new protocol has fewer miners, which translates into greater centralization, more weak points, and less primary resources building and protecting information.
The longer the blockchain becomes, the stronger it becomes.
Bitcoin’s blockchain is so huge that it would take more computation power than currently exists to try and recreate it.
This makes transactions extremely trustworthy and the protocol extraordinarily strong.
Benefits of Blockchain Technology
The primary value of blockchains is the ability to store, verify, distribute, and permanently record large amounts of data, including transactions records, allowing the removal of a trusted 3rd party.
The technology automates information exchange across all digital mediums. A revolution is coming, led by blockchain technology.
All information stored on the blockchain is permanent and unable to be changed –
Compare this to traditional storage methods that require a 3rd party.
The requirement of human involvement for trusted transactions inevitably leads to corruption, bloat, and inefficiency.
Blockchain has the ability to automate every single one of these aspects potentially causing massive fiscal and social change.
Bitcoin proves blockchain is capable of operating and acting as the underlying infrastructure for a new monetary system.
Its immutability is also useful for hosting videos and streaming content.
With blockchain, users can create unique content that cannot be stolen and duplicated infinitely, allowing them to better monetize their work.
Blockchains are not controlled by any single entity.
Google, Facebook, Amazon, and Microsoft, these companies control the internet. The majority of emails, pictures, videos, and information shared online is stored on their proprietary servers.
Their services aren’t free, you are the product. When you use a “free” internet service, like Gmail, the company is monetizing your information, collecting your personal habits and selling that information to the highest bidder.
The dominance of a small number of companies on the internet is a phenomenon known as centralization and it leads to corruption and reduced incentive for technological advances.
In contrast to our current tech space, public blockchains and the cryptocurrencies built on them are decentralized. There is no organized company or group of people controlling the information stored on them or even how they operate.
Blockchain technology is going to challenge current monopolies in the tech space.
The world is now accustomed to sharing digital information and monetary transactions via the internet.
Blockchain technology further improves upon our technological experience and creates an infinite number of possibilities for people to engage with each other without relying on companies and 3rd parties.
It’s bringing freedom and entrepreneurism to the digital world on an individual level.
Current tech companies are plagued by hacking attacks where nefarious actors access and steal private information.
It has gotten to the point that your email address and even credit card information has been sold or stolen at least once.
There are industries built around the collection of valuable information.
Centralized systems are inherently at a disadvantage because criminals know where their information is kept. Decentralized systems, on the other hand, do not have a weak point.
Large public blockchains are distributed across hundreds of thousands of computers, it would be impossible to attack every single one simultaneously. This makes blockchain incredibly robust and secure.
Let’s say you are buying a pair of shoes online. These aren’t mass-produced shoes you find on Amazon, these are handmade, and they look amazing.
The artisan with whom you want to conduct business has a small operation and they rent space on a server to host their website. They use a simple plugin to help with credit card transactions.
Unfortunately, without their knowledge or yours, the server where their website is stored has just been compromised and all of your private data has been collected by a malware.
If instead, the shoe-maker opted to put their Bitcoin public address on their website, you could have ordered a pair of shoes and sent them Bitcoin. This way, his private key is not going to be compromised.
If you use a traditional bank, for example, you’re placing tremendous trust in that bank. You’re relying on them to handle your money safely and you can only hope that they provide the services they promise.
Many times, reality doesn’t match these expectations. Individuals experience delays in payment, withdrawal, and money transfers.
Every day, accounts are frozen or limited for reasons that customers do not understand.
Banks can even go bankrupt – like the Lehman Brothers.
Blockchain automates exchanges of information (including transactions). Instead of trusting a company, users trust a computer program with preset rules.
This reduces fees infinitesimally. For example, users can transfer millions of dollars worth on blockchain networks for less than $1.00.
As the competition in digital transactions heats up in the blockchain space, lower cost and faster options will continually be invented.
The days of paying credit card companies fees and relying on Paypal for online purchases are coming to an end.
Cryptocurrencies built on top of blockchain technology give individuals the capability to carry out transactions anonymously and use money without another party interfering.
Some people like to send value anonymously and some are using blockchain as a tool to get their privacy back.
As the world continues to go digital, governments and big corporations are gaining more control over our personal data.
This includes information as benign as what you studied in college, the name of your first pet, your favorite restaurants but it also includes your spending habits and who you send money to.
The combination of this information makes it easy for nefarious actors to have the tools they need to start controlling your life.
Banks and governments are known to prevent sovereign individuals from spending their own money.
One notable example of a banking failure is the Wikileaks example. Individuals that wanted to donate to Wikileaks (a bold non-profit journalistic organization) in 2010 using traditional banks found their funds frozen.
However, Bitcoin provided an alternative that allowed these same individuals to make donations to Wikileaks without issue.
Freedom as a result of blockchain is more than simply monetary transactions.
When the Chinese government wants to censor internet searches, they can do so with a flip of a switch.
Decentralized exchange systems, such as blockchain, prevents authoritarian regimes from controlling the flow of information.
More examples and closer to home involves your bank account.
As it stands today, the federal government has the ability to freeze and liquidate your assets. Is it really your money if they can leverage this amount of control over you?
This amount of authority over our personal wealth leaves society open to being taken advantage of.
In countries where the government is more corrupted or there exist mafia-like tendencies, money systems based on blockchain are becoming increasingly more valuable.
Digital currencies are essentially just files, think of MP3’s as an example. Their ability to be replicated, nearly infinitely, makes music hard to commodify.
Blockchain has changed that. Now, we can create digital assets that are unique and unable to be copied. This is all thanks to the distributed-ledger aspect of the technology.
If you were to make a copy of a Bitcoin, you would have to rebuild the entire blockchain!
Hopefully, our blockchain for dummies guide has outlined blockchain technology in a way that shows you how valuable it is.
The largest reasons people point to resisting the adoption of cryptocurrencies is that of safety and security. Specifically, the fear of losing cryptocurrencies to hackers, computer errors, or unforeseen nefarious activity.
Traditional banking is seen as “tried and true.” We’ve been conditioned to use banks and most people have never had significant problems with them. So why would we adopt a new, relatively unproven method of doing the same thing?
The reality is that blockchain technology is much safer than traditional banking.
Public blockchains are open-sourced: this allows everyone to inspect the codebase and ensure it works as advertised.
Also, there’s a huge community working to fix any potential issues. Compare this to closed source systems – like banks – where you have to trust them to dictate the rules.
Blockchains operate with three levels of security that protect their users in ways that other alternatives don’t.
The first level of security is decentralization.
If you place your trust in a blockchain rather than a bank,you’re not trusting any single entity. You’re trusting technology.
Transactions are completely automated, there is no human intervention involved with the protocol.
This means there is no centralized authority capable of making huge mistakes or supervising and controlling the actions of participants. As long as the software is running, the system works.
The second level of security is cryptography. Or digital signatures to be more specific.
Each and every one transaction is signed by the sender using his private key. Then, the receiver uses the sender’s public key to verify that the transaction was indeed signed by the rightful owner.
Of course, you’ll need to pay careful attention to your private keys, like it’s gold. This will be your responsibility. Keep them secret, keep them safe.
The third and final level of blockchain security is miners and/or nodes.
These miners/nodes participate in a blockchain by continually verifying all transactions that occur on that blockchain.
Rewriting or corrupting of a blockchain’s data is virtually impossible because miners/nodes are always ensuring that all of a blockchain’s data stays correct.
In order to change the data in a way that would compromise a blockchain’s integrity, an attacker would have to gain control of the majority of the miners/nodes on a blockchain.
This is called a 51% attack.
Large protocols, like Bitcoin, are safe from this style of attack because of how huge they are.
Many new projects start as an ERC-20 token, which operates on top of the Ethereum protocol. Ethereum is safe and building a new cryptocurrency on top of the Ethereum blockchain is a safe bet.
However, smaller cryptocurrencies building their own blockchain might still face such dangers, and early investors should do their research.
Decentralization, cryptography, along with miners and nodes, represent three extremely efficient levels of blockchain security.
The technology is always improving and is already far safer than the media makes it sound.
People who try to discredit blockchain based on security fears are wrong.
Decentralized blockchain technology is more secure than traditional means of data storage. The main selling point always reverts back to financial autonomy over assets.
Blockchain puts that power in your hands.