This post is to relay some “blockchain” learnings – meant to be a “layman” read primer, and I hope you find it useful. Much has been written about this already, but hey, I find solace in this tweet:
Going about it in Q&A style.
1. What is Blockchain?
You know that thing called a database that contains a bunch of data and information? Blockchain is that, a data ledger in essence, but is accessed and controlled by everyone and not one single entity like banks or regulatory bodies. A ledger of all the data is in possession to all Blockchain users where the content / data in the ledger is always in sync with the others. Users of the ledger can exchange items of value through this ledger. The whole idea is to liberate consumers from inefficiency, cut out the middleman and truly let the free markets reign.
2. What do you mean everyone? Does that include me?
It can, if you want to. The process is technical, but basically you need some dope math skills and large computing power. The machines with such power are called “mining rigs”.
3. Is bitcoin Blockchain?
No. Bitcoin is a digital token that lets you send money to any person in the world to pay for goods and services over blockchain, so they are not synonymous, although have definitely been used as such in the past. A large network of computers work 24/7 to check the legitimacy of transactions and process them in real time so that no bank / government needs to be a middle man. The computers also keep track of everyone’s bitcoin balance and publishes them online as a shared public ledger. This ledger, which lets anyone check transaction records to make sure they received payments or payments they sent were accepted, is the blockchain (link to 1!). In timely intervals, the super power computers updates the ledger with a “block” of the recent transactions from all bitcoin users worldwide. Once the block is added to the ledger and all computers in the network agree it is legitimate, everyone’s bitcoin balance is updated.
So blockchain technology is simply using a network of computers as a ledger system to keep perfect records. Because for blockchain to remain “secure”, “decentralized” and “impartial”, it is imperative that blockchain is powered by computers owned by a huge variety of people around the world (as, if someone owned 51% of the computers on the network, they can stop user transactions from processing and the blockchain becomes ineffective). These people are incentivized to add their computer power to the network because they can earn “bitcoin” / $s by compiling and verifying transactions (or more popularly known as bitcoin mining) into blocks.
4. I am pretty sure Bitcoin is blockchain.
Aha. That Capital B. So yes, blockchain has different protocols, and the Bitcoin protocol is one (confusing I know) but was the first one, developed by Satoshi Nakamoto in 2008, now Craig Wright. All alternative block chains, more popularly known as altchains are based on the Bitcoin protocol in concept and/or code but they vary on functionality such as “digital currency” rewards, computational complexity, bandwidth use, storage needs, etc. The 2nd most widespread blockchain protocol is Ethereum. Read here the 7 main differences between the Ethereum and Bitcoin protocols. Many people believe Ethereum is the right protocol to be building applications on top of the blockchain, and is the largest and most well-established open ended decentralized software platform. In fact, Ethereum is not just a platform but also a programming language running on a blockchain, thus helping developers build and publish distributed applications. More here and here on Ethereum and Ethereum vs. Bitcoin.
5. Tell me more about bitcoin mining?
Let’s say Jon wants to pay Lucy 5 BTC. Jon sends out that transaction info (send Lucy 5 BTC) to all the computers in the Bitcoin network so that the transaction can be recorded unanimously on the ledger. Every computer that receives this transaction updates their ledger and passes along to the next node/computer.
But how do the computers verify the request is authentic and that Jon himself sent this request as everyone on the network is anonymous? Digital signatures are what’s used - a new digital signature is created for every single transaction. A digital signature works by using two connected keys, a private key to create the signature and a public key used to verify the digital signature. Think of the private key as the true password, and the signature as an intermediary that proves one has the password without revealing one’s identity or one’s private key. Public keys are actually the “send to” address, so Jon is sending 5 BTC to Lucy’s public key. To prove that Jon is the true owner of the 5 BTC, Jon generates a digital signature from the transaction message and his private key. Other computers in the network can use that signature in a different function to verify that it corresponds with Jon’s public key; through the math behind the digital signature they are able to verify who owns the private key, without actually seeing the private key.
Also, because a digital signature depends on the transaction, the signature is different for every other transaction and so cannot be re-used by anyone else. No one can also change the message as it makes its way through the entire network of computers, as any changes to the message would invalidate the signature.
It gets more complicated with inputs and outputs of transactions, which feel free to see this video to learn more about.
6. But why do we need bitcoin if we have blockchain?
Because “bitcoin as a digital currency powers the blockchain through incentivized mining” – BitcoinDaily.Org.
Individuals who solve the math problems of connecting digital signatures to public keys publishes that information to the Blockchain and all the other computers double check that answer to confirm the solution. If the solution is accepted, the original computer that solved the math problem is rewarded with newly generated bitcoin and the fees that bitcoin users paid to have their transaction processed. Since bitcoin can be FXed for real $ (currently 1 BTC = $450), miners want to solve as many blocks as possible and the only way to do that is to add more computing power to the network. Interestingly this incentive system works to grow the network strength through competition (heyo game theory).
A couple other notes on this point:
1. Every 4 years, the bitcoin reward on completing a successful block is cut in half; eventually there will be no new bitcoins and the only reward will be the bitcoin transaction fees. Anyone who wants to use the blockchain, whether to pay for goods or run a financial service, has to pay fees in bitcoin to the bitcoin miners to have their transaction processed in a timely manner.
2. There has been and there still is a lot of discourse in the developer arena / academia on what the size of a block should be, aka how many transactions should be contained in a block. Currently it’s at about 1,600 – check out this chart to see historical fluctuations (max of 2036 transactions)
7. I hear “hashes” a bunch. What’s that?
Not that kinda hashish. It basically refers to the measuring unit of the processing power of the computers connected to the blockchain.
8. Why isn’t everyone mining bitcoin?
Because you need special hardware, which is expensive and then keep the computer running at all times, resulting in high electricity costs - most new users unable to recover a ROI on their hardware investment and never mind the technical acumen you need. However, if you really must, try the 21 Bitcoin computer to get up to speed, which is there to help eliminate friction in user adoption and is the simplest way to introduce developers into the bitcoin ecosystem. I hear it’s not an efficient miner though (just has a really bad hash rate) but at $400 pretty affordable.
9. Give me some “blockchain” properties.
a. Decentralized – everyone knows about everyone else’s transaction
b. Trust – special mathematical functions protect every aspect to the system, so the need to trust an “entity” or a “person” goes away
c. Tamper-proof – blocks are added to the blockchain in linear, chronological order through cryptography, ensuring they remain beyond the power of manipulators
10. Give me some more links to learn more!
"The Blockchain will be to banking, law and accountancy as the Internet was to media, commerce and advertising." - Joi Ito, Director of the MIT Media Lab