Blockchain Basics (You Got This!) 💪 😎
Blockchain technology allows one person or group to transfer digital assets or data over the internet to another person or group, regardless of location or time of day. This type of transaction is known as peer-to-peer (P2P). P2P transactions on the blockchain are safe, secure, and immutable. The most unique quality is that each P2P transaction is completed without the use of an intermediary — a bank or other institution (stock market, money transfers, or municipality).
Blockchain and the assets that are represented by the relevant blockchain should be thought of as two totally separate subjects. We are exploring the technology called blockchain, and nothing in this article will be related to the price or owning bitcoin/cryptoassets of any kind. This is purely the technology, nothing to do with the market, trading, buying or selling, just the underlying technology.
This will not be an end-all-be-all for blockchain education. This technology is changing at an unprecedented speed, so there will always be new topics to learn and discuss. The goal is for YOU to have a better understanding of this great technology. There are different blockchains, but for this piece we will use Bitcoin’s blockchain as the main example. Aspects of Bitcoin ( Capital “B” means the technology/blockchain that supports the asset bitcoin, lowercase “b”) are similar to other blockchains, including Ethereum (more on this later).
Learning about the blockchain can be a bit of a rabbit hole, and I happen to like this analogy. We’re going to dive down the rabbit hole as we learn more about blockchain technology. Sticking with the nuances of this dynamic industry, I will do my best to explain the blockchain in reference to YOU, going down the rabbit hole. Number 1 is you sitting at the the top of the rabbit hole excited for all of the great things you will learn. As we go in sequential order you will have dove head first eagerly searching for more and more information.
Its creator used the moniker Satoshi Nakamoto. The true creator of bitcoin has not been discovered. You can read more on that here.
- Bitcoin’s blockchain connects data and information through computers that are linked on a decentralized network through WiFi (nothing special).
- A decentralized network is run by many computers called nodes. These computers are all over the world, and are setup/run by everyday people like you and me. Once the nodes are setup, the process is pretty much automated-meaning it does not take much to maintain the node. The computer runs by itself, and is connected to the blockchain as long as it is turned on. The computer can be used for other activities while also running a node.
- In order to act as a node, a download of the full blockchain/ledger (called Bitcoin Core) to a computer is required, which at the time of this article is approx 172GB. Blockchains are often referred to as ledgers, in the original since of a ledger keeping records. In this case, the blockchain is a ledger that keeps records of all transactions, the parties involved, the date/time, the amount transacted. There is other information stored in blocks on the blockchain but this is getting into the weeds as far as cryptography and the technical aspects of the blockchain.
- Once this happens, the computer connects to the network of other nodes and starts supporting the Bitcoin blockchain.
- When new information enters the network, and is requested to be added to the ledger/blockchain, the nodes (other computers) on the network verify the data/information that is trying to get added to the blockchain.
- In bitcoin’s case (the asset), the nodes (being run on many different computers all over the world) are checking to make sure that the sender and receiver of bitcoin are valid, and that the coins that are being transacted are in fact real (digital) coins.
- The above process is known as “trustless”. In other words, there is no one single entity verifying transactions or data. The decentralized network (computers running the nodes) verifies everything.
- Transactions are anonymous.* As a sender or receiver of bitcoin, personal information is never shared on the blockchain. Transactions are made using digital wallets that contain a public address. This enables the user to conceal their (true) identity while still making transactions.
- Once all of the data is verified, the transaction is added to a block which will soon be added to the blockchain. Each block holds hundreds to a few thousand transactions.
- The data that is added to the blockchain is immutable. Stick with me, we are going to skim the surface. ONE part of the data included in the block is the PREVIOUS block’s hash (an identifier). In other words, each block in the blockchain is connected by having the previous block’s hash in it’s own block.
- The Bitcoin blockchain is reputable. It would cost upwards of $2.5 billion to attack the network and change the data of a block. Which leaves no economic incentive to attack the Bitcoin blockchain. (Typically, when people reference the blockchain under bitcoin, they would just use Bitcoin, but I wanted the concept to be easier to understand.)
OK, you can breathe a little. I hope this has helped in your quest to educate yourself. Next time some smartass college kid comes into the party ranting and raving about blockchain, you should at least be able to hold your own. I would like to take you a little bit farther. So I wrote this piece explaining blockchain as a protocol and why it is so important.
*In full transparency, there are ways for people/institutions to find the individual behind public addresses. Read this article for a full explanation. However, being prudent and responsible is imperative to maintaining anonymity.