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Blockchain 101

Today we are going to be answering a fundamental question of life. Okay, maybe not fundamental but pretty darn cool.

What the heck is a blockchain? Let’s dive in.

What problem is Blockchain solving?

It's really, really hard to trust people on the Internet, because you just don't know them. It’s especially difficult when money gets involved.

Unfortunately, there probably isn’t really a down-on-his-luck Nigerian Prince sending you emails, it’s just that Scammy-Kid-From-High-School. You can’t just conduct business with random strangers overseas and trust that they’ll pay you, unless you use a third party system like PayPal that takes a large cut.

We’ve gotten used to relying on banks and companies like PayPal to keep our finances safe, but these companies charge us a hefty price for their services, and in the past, these platforms have failed and customers have lost all their money.

Blockchains allow us to safely transact with people digitally, even if they’re strangers–without using a third party like a bank. And that’s a game changer. For the first time, we can safely trust perfect strangers, and even conduct business with them, all without going through a middleman.

Let’s dig a little deeper in the next section.


What is a Blockchain?

Doing financial transactions requires record-keeping. Companies like PayPal do their own private, centralized bookkeeping. Blockchain technology uses public, decentralized bookkeeping.

Instead of one, top-secret copy of the ledgers held by a private entity, thousands of people all around the world each keep their own copy using a specialized computer program. These computers constantly compare their own ledgers to everyone else’s and check to be sure that no one is trying to cheat.

When you put money in a bank, that money is out of your hands. If that bank fails or is hacked, your money is gone, and there’s nothing you can do about it. Blockchain, on the other hand, is decentralized–a vast network of thousands of computers, all around the globe, contribute to network security. This makes the network far more resilient.

This is the core of how a blockchain functions. We don’t want to trust any one entity to keep the Ledger, so instead we trust a decentralized system made up of individuals all around the world. And it works.

Okay, so we have the main idea down. Let’s get literal. How. Does. It. Work?


How does it work?

Here we go!

At the core, blockchains act like ledgers. For ledgers to function they need to be able to reference people. A blockchain needs to be able to say “Kate’s Account sends 1 Bitcoin to Jamal’s Account.” This is to say, users need some kind of account.

Every user has an account with two parts: a Public Key (often called a Public Address ) and a Private Key. Think of it like your email account. People send emails to your email address; people send cryptocurrency to your blockchain address. To send an email, you have to use your password to log in; to send cryptocurrency, you have to use your private key to log in. (This is a bit of an oversimplification, just for the purposes of getting the idea down.)

Email address, email account password. Public Address, Private Key. These are analogous.

Your email password should never be given to anyone, because your password grants complete control over your account. In the same way, your private key should never be given to anyone else. Don’t worry, no names are involved. Instead, your Public Address and Private Key will both be long, random strings of numbers and letters. This is what protects your identity.

So what actually happens to a transaction on a blockchain?

To send someone cryptocurrency, you need several pieces of information: the recipient’s account information (their Public Key), how much you want to send, and your Private Key. Once you hit send, the transaction is broadcast to and received by thousands of computers all around the globe. One little piece of info: your Private Key acts as what’s called a digital signature. A digital signature is like your digital seal of approval, certifying that it was you--and only you--who sent a transaction.

All of the behind the scenes technical legwork is handled by a piece of software called a wallet (more on those later)–you don’t actually have to know any code.

The transaction is reviewed by each computer on the network, and each computer has its own copy of the public ledger. The computers check to see that your digital signature is valid and that your address has the necessary funds to complete the transaction. This is referred to as transaction verification. Once your transaction is verified, individuals called miners come in to do the heavy lifting with fancy, number crunching computers.

Quick recap of what we’ve covered so far: accounts have two parts, a public key (also referred to as a public address) and a private key. When you send a transaction to someone else’s public address, it must first be verified by thousands of computers. Then the miners step in.


What is mining?

Miners are responsible for a two special things: grouping verified transactions into what are called blocks, and adding those blocks onto the official ledger.

While the first is rather easy, actually adding a block of transactions to the shared public ledger requires a great deal of energy and computational work. Miners put in computational work by having their computers endlessly solve complicated math puzzles. It’s this work that makes the blockchain nearly impossible to cheat. What’s the point of having computers solve… math puzzles? After all, electricity is expensive!

Well, running these computers costs a lot of electricity, making it expensive to try to commit fraud. If a miner tries to do so, they have to compete against allllllll the other miners who are keeping the network secure. In order to successfully attack the system, a miner would have to spend more money than every other miner, combined–and that’s prohibitively expensive. For more information about just how hard this would be, see Mining.

Okay, so it’s nearly impossible to commit fraud. But what’s the incentive to mine? As we just established, it’s an expensive process. Well, when a miner out-solves the other miners (solves the math puzzles first) they earn the right to add the next block to the blockchain. When they do so, they are rewarded for their efforts with newly minted cryptocurrency. If you solve a Bitcoin block, for instance, you receive 12.5 bitcoins.

Importantly, each block that is added to the existing public ledger contains information about the block that came before it, which is linked to the block that came before it, and so on, creating a sort of…chain…of blocks (eureka!). Because the blocks are linked, changing even a single transaction in any block would change that block and every block following it, making fraudulent activity obvious. The chain starts with the first block ever made, contains every transaction that’s ever happened, and is constantly being updated. That’s the Blockchain!

Let’s recap: Blockchains are public ledgers that thousands of people all over the world work to maintain and secure. In fact, they’re used by thousands of other cryptocurrencies besides bitcoin, with potentially different rules and fancy technical terms. And as it turns out, blockchain technology is capable of much more. That’s because at its core, blockchain can store and verify any kind of information, not just data about transactions. Blockchains could encourage an entirely new view of our world. In the words of Vitalik Buterin, creator of Ethereum and hyper-smart hyper-geek: "Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly." So what is blockchain? Well, it's complicated...



What problem does blockchain aim to solve?

  • Trusting people online with transactions of value is incredibly difficult

  • Centralized third parties help prevent fraud, but take large cuts for their services

What is blockchain technology?

  • Instead of having one, top secret copy of the ledger of account balances held by a third party, blockchain utilizes a globally distributed network of thousands of individuals to maintain the system

  • These individuals constantly check to be sure that no one is trying to cheat, and that cheaters are cut out of the system

How does blockchain work?

  • Accounts on a blockchain have two parts: the public key and the private key. The former is given out like an email address; the latter allows whoever has it full access to all of your funds

  • When you initiate a transaction, your private key is used to generate a digital signature proving your ownership of the account. This signature must be verified by the distributed network before your transaction is accepted as valid

What is mining?

  • Miners group verified transactions into blocks and solve complex math puzzles to earn the right to add the next block to the existing record of transactions (chain)

  • The winning miner is rewarded for their efforts with newly minted cryptocurrency

  • Each block is linked to the block that came before it

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