Basics of Bitcoins and Blockchains

Hey guys,

To anyone looking for a basic but solid understanding of Cryptocurrencies, Blockchain, Bitcoin, Ethereum and much more, would highly recommend checking out The Basics of Bitcoins and Blockchains by Anthony Lewis.

I read it a while back and I was really glad how it was completely true to its name and started from the extreme basics, gave real world analogies one could relate to and used words that even someone from a non-technical background can understand.

Sharing some extracts with you to pique your interest… some insightful, some eye opening and some just downright hilarious:

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On the barter system and how its inefficiencies gave rise to invention of money - Strongly contradicting what I read for years in college

This elegant argument seems intellectually neat. Unfortunately, there is not a shred of evidence for it. It is pure fantasy - the textbooks are wrong! When you hear someone talk about money being invented to replace barter do please educate them or talk to someone else. Money solving the inefficiencies of barter is a myth popularized in 1776 by Adam Smith in [his book] The Wealth of Nations.

On the risks of excessive Quantitative Easing (increase of fiat money in circulation by Central Bank to stimulate an economy) - Both extremely relevant in recent context?

1. With excessive QE, the value of money will go down as there is more of it sloshing around in the private sector which is not great for savers and could also cause price inflation
2. A central bank owns risk financial assets that could go down in value, damaging the central bank's balance sheet when the value of the assets it owns falls.

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On Bitcoin mining

Mining is a tedious, repetitive job. Take some transactions with the nonce, hash it, see if the hash is smaller than a certain number, and if not, repeat with a different nonce. It is not 'solving complex mathematical problems' as is widely described in the media.

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On tools for Bitcoin mining

Although anyone can mine, the process has become so intensive that new hardware and chips are created which are designed to be exceedingly efficient at performing the hashing. ASICs (Application Specific Integrated Chips) became the norm for mining in 2014 and could outcompete all other forms of hardware in terms of energy efficiency for Bitcoin mining. In the popular media, the computational power of these specially designed chips is often compared to the computational power of supercomputers, but ASICs cannot operate as general purpose computers so comparisons with supercomputers are meaningless

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On Bitcoin storage

So where are bitcoins stored? Well, ownership of bitcoins is recorded on Bitcoin's blockchain. Bitcoin's blockchain doesn't store balances of accounts (it is not a list of account balances with corresponding BTC balances), it stores transactions. Bitcoin wallets store private keys (not bitcoins) and their software makes it easy for the user of the wallet to see how many coins they control and to make payments. If you cloned your wallet you would be closing private keys and not doubling your bitcoins.

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On Satoshi Nakamoto (the author of the original Bitcoin Whitepaper, whose identity is unknown)

Satoshi's real-world identity matters because, if the real person or group of people were discovered, their views and voice could dominate the future of Bitcoin. However, this centralization is what they are trying to avoid, They would also have extremely high personal security risk. It is never a good idea for people to know (or even believe) that you have significant amounts of wealth, especially in cryptocurrency.

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On comparison between Bitcoin and Ethereum governance

Although, Bitcoin and Ethereum are both open source projects and open, permissionless networks, one of the biggest differences between them is that Bitcoin doesn't have an active, identified leader, whereas Ethereum does. Vitalik Buterin, the creator of Ethereum is hugely influential, and his opinions count. Although he can't stop his creation or censor transactions or participants, his vision and commentary have a big impact on technology. Bitcoin, on the other hand has a few influential developers but none with the clout that Vitalik has with Ethereum.?

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On cryptocurrency forks

Forks, or specifically chainsplits are often described in the media as 'stock split'. This is a poor analogy because in a stock split, more shares are created and assigned to shareholders but the old and new shares all represent the same thing. This is not the case in a cryptocurrency chainsplit. A 'spinoff' is a more accurate analogy because in a spinoff, shareholders of the old company get new shares of a new company. This is similar to a fork where holders of the original count also get the new coin which has different rules from the old coin.

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On Blockchain's Supply Chain use case

Tracking real world items by using a digital overlay is difficult. Blockchains are great for tracking unique digital items that only exist on that blockchain, but not as good as when digital and physical worlds collide. Blockchains don't tell the truth, they just record what someone tells them. Perhaps blockchains could increase certain aspects of transparency in a supply chain, but they are not foolproof and should not be used just because the phrase 'supply chain' has the world 'chain' in it.

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On e-Sports

Some people mock or bully those who watch other people playing computer games, or those who dress up for fun as their favourite characters. Often these same people will themselves watch other people kick a ball around on some grass, dress up as their favourite footballer, sing songs and pretend to be them.

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As a huge football fan, I took that last one personally :D