The Ultimate Guide To Understanding The Basics of Blockchain and Cryptocurrencies

Original cartoon can be found at http://ericsammons.com/what-is-the-blockchain/

How I often feel when I hear someone talking about cryptocurrencies.

If you watched the hilarious satirical guy explaining bitcoin and understood almost none of it — fear not — today we are going to decode his message!

Where do we even start? I know! Let’s start by the most obvious — blockchain! What the hell is a “blockchain”?

Blockchain is basically just a decentralized database — a ledger if you will.

What is the difference between centralized and decentralized? Let’s imagine you have two apples and you want to give one apple to your friend, William.

Well, in a centralized world you would have to ask permission from Williams friend, Bill. First Bill will have to vet if you have the apple or not and if you do — Bill gives you permission to hand over the apple. Bill in this example is the bank.

But with a decentralized — you actually don’t have to ask permission from Bill, aka the bank. Blockchain will confirm if you have the apple and will proceed with the hand out.

How we can visualize blockchain

But wait, did you notice something strange? We actually don’t have physical apples on the internet — we have ones and zeros, aka bytes.

Those ones and zeros bundled together in a huge bag make up for what we call information. So instead of real world apples, we have information.

I would give you a copy of a piece of information and we would both own it. A lot of energy is put in creating a “thread” of blocks (called the blockchain) that prevent you from creating false ownership of the information.

Why do we even need this? Well, remember when we asked Bill for permission so can hand out the apple?

We have to trust in Bill to make the right decision. Bill has the power to exploit this transaction — for example — grabbing the apple for himself.

In a broad sense — blockchain key feature is to eliminate trust in humans and put our trust into mathematics and computing — which are most likely less prone to errors.

Here’s a great Blockchain demonstration by Anders Brownworth.

Blockchain in a nutshell: A world-wide computer that is formed by lots of computers talking to each other.

Google server rooms

Bitcoin

Money is just numbers. In a nutshell — Bitcoin is a just database with no way of messing with the numbers because all the computers keep a valid synchronized copy of the numbers. Bitcoin was developed by Satoshi Nakamoto, no one really knows who this mysterious person actually is.

Bitcoin is also the currency how we measure the value of the numbers/data. Interested in buying your first bitcoin? Read this.

Bitcoin is like digital gold, it is valuable because people agree to exchange it for other things of value.

Bitcoin successful because it was the first cryptocurrency which managed to solve the double-spending flaw.

Bitcoin has made their code open source on Github. This means anyone can take a look at the code, fix any flaws/exploits and improve the integrity.

Here’s the source code for Bitcoin.

Bitcoin can be held in a wallet. Just like a physical wallet — you can store money (bitcoin) inside. You can also take money from your wallet (sending bitcoin) and receive money (receiving bitcoin). Just like in the real world.

Where does bitcoin get its value from? The answer is easy: because it’s useful and scarce.

How bitcoin transactions work

Source

Bitcoin strengths

• First mover advantage. Bitcoin was the first cryptocurrency.
• Bitcoin is easy to divide and recombine. For example: ​1⁄1000 = millibitcoin, ​1⁄100000000 = satoshi.
• Impossible to counterfeit.
• Ease of moving — Think about gold for a second. If you have five tons of gold, moving it and securing is very expensive. You have to pay the logistics company, security company and the people who maintain it. With bitcoin you just send it to your wallet and put it on a Ledger Nano S and it’s safe in safe, pun intended.
• You can send bitcoin to any wallet address, no need for permission!

Bitcoin weaknesses

• Steep fees. 5 years ago fees used to be almost non existent — currently the fees are big problem!
• Scalability issues. The bitcoin scalability problem exists because of the limits of the maximum number of transactions the bitcoin network can process.

Ether and Ethereum

Ethereum

Ether is the currency. Ether fuels the Ethereum ecosystem. Like Bitcoin or Litecoin — Ether is a measurement of value.

Ethereum platform/network which you can build things on top of.

Both Ether and Ethereum are founded by Vitalik Buterin.

Ethereum is built with blockchain technology. Remember the blockchain keyword — just a decentralized ledger/database which keeps track of things.

Think of Ethereum like digital oil, it is valuable for the work it is able to do.

You can use Ether just like Bitcoin, send, receive or store.

How do Ether transactions work?

Ether transaction

Lots of numbers and gibberish — don’t worry — we’ll decode all of this!

Ether transactions are basically smart contracts.

What are smart contracts?

The term “smart contracts” was coined by a cryptologist computer scientist, Nick Szabo, in the 90s.

Image via blockchaintechnologies

Think of smart contracts like a vending machine. You see a 2$ tag for a bag of chips and if you insert 2 dollars, you will get a bag of chips. This is called the terms of the contract.

Now what happens if you insert the money? The vending machine will hand you the bag of chips! Smart contracts are based on the idea “if-that-then-this”.

Ethereum block structure

The reason why smart contracts are so trendy is because smart contracts combined with Ethereum and blockchain technology eliminate the need for intermediaries and escrow services.

All transactions have three critical pieces of data.

1. From which account is the money sent?
2. To whom?
3. What is the amount being transferred?

This is what a ether transaction looks behind the scenes. The first argument is from who, second to whom and third how much?

Ether transactions are powered by gas. Gas is the internal pricing for running a transaction or contract in Ethereum.

The gas system is not very different from the use of Kw for measuring electricity home use. One difference from actual energy market is that the originator of the transaction sets the price of gas, to which the miner can or not accept, this causes an emergence of a market around gas. You can see the evolution of the price of gas here.

Gas prices

Gas makes sure that nothing runs forever, and that people will be careful about the code that they run. It keeps both miners and users safe from bad code!

So far we talked about Ether — the currency, ether transactions and gas.

Let’s dive into what’s Ethereum — the platform.

So what exactly is Ethereum?

In a nutshell, Ethereum is a platform used to build Ethereum powered decentralized apps — also know as dApps.

Decentralized applications (dApps) are applications that run on a P2P network of computers rather than a single computer. dApps, have existed since the advent of P2P networks. They are a type of software program designed to exist on the Internet in a way that is not controlled by any single entity.

Examples: BitTorrent, WebTorrent, Popcorn-Time, BitMessage, Tor are Peer to Peer decentralized applications.

dApps infographic

In a nutshell: dApp = frontend + contracts

But what are the advantages using dApps?

• Payment processing: No need to integrate with Stripe or PayPal to accept funds from users. All users can send/receive Ether as a common payment means.
• User Credentials: Users don’t need to sign up; they already have an account, which is a public/private key to bind with their user session and metadata.
• Database: Storing a lot of data in the blockchain is expensive, so likely the blockchain isn’t going to be the only database for the application, but mission-critical pieces of data can be stored forever on the blockchain.
• Logging: Etherum contracts can create their own logs, which a DApp can query to know what’s happened in the past, rather than needing to create separate logs.
• Trust: Your users can trust your code, since not only is the front-end (Javascript) code visible (via browser inspection tools), but the back-end logic (contract code) can be inspected too, so it can be independently verified that your code doesn’t have backdoors in it to steal all their funds.

— Source

We only scratched the surface, there is a lot to cover, but we covered the basics of most important topics.

Hope you enjoyed reading this! ❤

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Here are also some of my previous writings!

How to Buy Your First Bitcoin_Disclaimer #1: Always invest what you’re willing to lose! I can’t recommended enough not to bet more than you’re…_hackernoon.com

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Thanks for reading! ❤