Do you even know what Blockchain is?

Learning about Blockchain has been one of the most exciting topics I have researched. I had heard about Bitcoin and I knew it was a digital currency, but the only news that actually got (and still get) to the mainstream were typically negative or speculative, and did little to explain the technology behind it – Blockchain. After watching a Netflix documentary “Banking on Bitcoin” I was finally interested in knowing more. And what a process it is, research, read, watch videos, interviews, rinse and repeat.

As I see more and more people talking about Bitcoin and other cryptocurrencies, I realize most of them don't know the basics of how this technology works. But even if you're only buying into this hype to speculate and make some money trading it – which is a perfectly legitimate thing – have you ever wondered what this technology really is?! For someone without a technical background it can be frustrating trying to navigate through articles and videos while being bombarded with words like "hash rate", "consensus", "proof-of-work", "miners". Give this article a chance, and I promise I will keep it simple!

Bear in mind, I will not attempt to discuss if Bitcoin is a bubble or not, if it’s used for illegal activities or not, if there are scammers using it to fool other people or not. My answer to those questions is a definite “yes” – as it would be if we were talking about traditional money. But that doesn’t mean we should simply dismiss the technology. Blockchain is the underlying technology behind Bitcoin (and other digital currencies), but Bitcoin is only a part of its potential. If you would like to learn more about it, and be able to say something else other than “Bitcoin is a bubble”, or “Bitcoin is used by criminals”, go ahead and read on!

What is it?

Simply put, a blockchain is a ledger that contains every transaction and every account balance on that blockchain since its creation (the accounts are actually called “wallets”). This ledger is permanently updated and replicated throughout the whole network of miners (think of miners as the network “accountants” that are connected to it and validate transactions between wallets). Up until the Blockchain technology came along, every form of digital currency faced at least one particular problem, which was “double-spending”. Since we are talking about digital money, anyone with the right set of skills could copy the money and potentially spend it more than once. As an example, consider person A issues a payment of 100 coins to person B. Person A then copies the payment transaction and sends it to person C and D. It’s a bit more complicated than that, but I'm keeping it simple! Addressing this issue was one of the revolutionary features of this technology.

It enabled any digital currencies to finally become a trustless decentralized system. In fact, with this technology, anyone can start their own digital currency on its own blockchain. It’s like anyone can be a central bank, issuing their own currency, provided it has some kind of purpose or utility. Person B, C and D do not need to worry if person A is attempting to double-spend the 100 coins or not, because the network of miners will validate only one of the transactions and communicate with the blockchain, posting that transaction, replicating it to the whole network, and updating the balances on each wallet involved. The other copies of the transaction will be discarded as the balance on person A wallet will be updated on the whole blockchain after every transaction.

How does it work?

One key aspect that is usually more difficult to explain is the miners role in all this. Why are they connected to the blockchain and validate transactions? How do they actually validate the transactions?

Every blockchain relies on the miners ability to validate transactions. If there are no miners, you can’t send the currency to other people. The validation process is basically using computational power from the miners to look at the transaction and solve a calculation (let’s call it a “puzzle”) that will then be presented as solved to the network. The first miner to validate a specific transaction will receive a reward in the form of that digital currency. This is the actual process of producing new coins (like a central bank minting coins in the traditional banking system). Newly produced coins (rewarded to the miner) will be placed in the miner’s wallet inside the blockchain. This is the much needed incentive to create a big enough network that is reliable, and above all, tamper proof.

If we keep rewarding miners forever, you’re probably wondering if the coin supply will then be infinite. In the case of Bitcoin, the supply is finite and there will be no more than 21 million Bitcoins in circulation. When Bitcoin was created, there were only a few hundred miners and a few thousand users and it was perfectly fine. The validation “puzzle” difficulty was easier then, and you could be a miner with a regular laptop running simple software, and get a few bitcoins in a short amount of time. Today, you will need an expensive dedicated piece of hardware just to get started, because the “puzzle” difficulty increased a lot. This difficulty increase is part of the original algorithm described in the Bitcoin whitepaper, and it will keep increasing until the last Bitcoin is “minted”.

If you got this far, you may already have some – or actually a lot – of questions!

The objective for this article was to give you a basic understanding of what the Blockchain technology is and how it works. On my next articles I will aim to cover things like real life applications for this technology, challenges, limitations and criticisms, and some interesting projects that are being developed. If you would like to learn more about it, there is already plenty of information here to get you started on your research!

Feel free to leave a comment below if you have any questions or a topic you would like me to discuss.