Bitcoin

Blockchain and Bitcoin explained in a way your mom would understand

It’s difficult to talk about blockchain when self-described “experts” thread each discussion with terse cultural & technical jargon like “HODL” and “proof-of-work.” If you’re a lay-person, you probably have no idea how to make sense of that. It’s probably easier to just assume “blockchain” and“Bitcoin” are things that only ultra-nerds and financial-types know about.

For the rest of us, it just doesn’t feel real. This overview aims to fix that.

What is Blockchain?

Blockchain is a way to store information across a network of personal computers. Information on a blockchain can only “move forward,” meaning once something is recorded, it’s stored forever. Information can change on the blockchain, but the full history is open and available.

The blockchain concept relies on two main ideas: decentralization and distribution.

Centralized systems

To talk about decentralization and distribution, let’s start with the status quo: centralization. We use centralized systems every day. Most centralized systems rely on government oversight, like our central bank, or postal service. Other centralized systems rely on a company, like shopping on Amazon, or McDonalds.

Centralized systems rely on trust. For them to work, the consumers need to trust that someone is looking out for them. Like how you keep your money in a bank instead of under the mattress because you must trust Chase a bit more than your deadbolt.

Decentralized systems

When a system is “decentralized,” it means that no central company or network owns it. You’re using a decentralized system right now, the internet. There’s no CEO of the internet, overseeing what websites can or can’t do, and watching some “bottom line.”

Distributed systems

When you duplicate a system in a lot of different paces, it becomes much harder to corrupt or sabotage. When you read about the next big data breach (seems to happen routinely), you should think about what allowed that breach to happen. A company put all their precious information in one place, which makes it easy for someone to sneak in and do sneaky things with.

By distributing (read: copying) everything everywhere, a bad actor would need to change the data in all places at once in order to do their sneaky things.

It feels weird, but by opening up and giving the data to everyone, you protect it.

Cryptography

Each node in the illustration is a computer, who hold little bundles of data from the network (other people’s data). That data is secured by some fancy math called “cryptography,” which ensures the bundles can’t be altered or corrupted by anyone else.

Each bundle (block) is stored in a chronological chain, so it’s history is part of the network and completely public. The network stores the data in multiple places across the network in a distributed ledger.

That’s it. That’s what the blockchain is. You can stop here if that’s all you wanted to know.

Continue for more nerdy details…

What is a “block”?

A “block” in “blockchain” is a bundle of information your system wants to store: Grocery lists, research papers, contacts, whatever... Considering Bitcoin is a digital currency, it makes sense that a Blockchain “block” stores the sender, receiver, and amount of Bitcoin in a transaction.

Each “block” has a unique identifier called a “hash.” Computer create hashes by looking at the data stored in the block. The important thing to understand is that if anything in the block changes, the hash will too. This is the primary reason why “blockchain” technology is secure.

The blocks also have the previous block’s hash. That links it to the last one in the chain. That means you can’t come in and change something in “Block 2” without breaking the entire chain.

Why do cryptocurrencies exist?

Blockchain isn’t just digital money. It’s a shared public ledger that can’t be tampered with, which is useful for transactions and currency, but you can store anything you want on it, including software programs (smart contracts), taxes, maintenance records for things like planes and buses, etc…

Since the technology is still so new, there’s a lot of “cool” ideas on how to use it, but very little things out in the real world to point to as examples. The important thing to keep in mind is that blockchain is open-ended, and can be applied to many different problems in the world in new ways.

So if blockchain isn’t the same as cryptocurrencies, why do things like Bitcoin exist? The reason Bitcoin is secure is because each node on the network does the work of securing the ledger (called “mining”). These nodes offer up a lot of computing power and energy, and solve cryptographic problems which secure the network. In exchange for this, they are rewarded with something of value: cryptocurrency “coins”.

Without the incentive of a “coin,” and without having a form of currency to reward your worker bees, a blockchain system would struggle to be secure, and eventually falter.

Key terms

Here’s a glossary of some basic blockchain-related terms,

Bitcoin

The most popular cryptocurrency. It’s like US Dollars, if no one was responsible for it and it had no oversight.

Altcoin

There’s hundreds, if not thousands of other cryptocurrencies besides Bitcoin. Because Bitcoin was first, is the most popular, and by far the most valuable, most other coins are referred to as “alternative” coins, or “altcoins” for short.

Fiat

Regular money. Technically, “Fiat” refers to anything that doesn’t have intrinsic value (like water, food, or goats), but is assigned value, often by a government. Historically, precious medals have been used as currency, with civilizations agreeing that things like silver and gold are valuable, and can be used for commerce.

Cryptography

Encrypting and decrypting information stored on a computer using fancy math.

HODL

Someone misspelled the word “hold,” and because the internet is the internet, it stuck. Cryptocurrencies are very volatile, with some coins swinging wildly in value at random. “HODL” just means “hold,” and is used to suggest someone should refrain from exchanging their cryptocurrency for Fiat, lest they miss out on future rises in value.

Mining

The process by which transactions are verified on a blockchain. Mining solves cryptographic problems with computing power, and rewards the workers with the release of more cryptocurrency.

Proof of Work

A system that intentionally makes recording transactions on a blockchain more difficult by requiring a lot of computational power. By making transactions more difficult to create and verify, and by requiring many computers to work on it at the same time, the network ensures each transaction is secure.

Proof of Stake

An alternative to the proof-of-work system, in which your existing stake in a cryptocurrency (the amount of that currency that you hold) is used to calculate the amount of that currency that you can mine.

Node

Any computer in a blockchain network.

A brief timeline of Blockchain and cryptocurrencies

1991 — “Blockchain” was conceived by a group of researchers, who were trying to prevent digital document from being tampered with by stamping each document with the date with a network.

2008 — Satoshi Nakamoto adopted the blockchain concept to create a digital currency called “Bitcoin.”

2009 — The first Bitcoin transaction occurred when Satoshi sent his friend and cryptographer Hal Finney 50 Bitcoins (BTC).

2010 — One Bitcoin is worth $.08

2015 — Etherium was created, popularizing a new technology called “smart contracts” using blockchain.

2017 — One Bitcoin briefly hits an exchange rate of $20,000

If you’re into this, there’s more over here: https://cryptotimeline.com/

Resources

What is Blockchain Technology? A Step-by-Step Guide For Beginners
Profiles and quotes from a wide array of technologists and blockchain experts.
https://blockgeeks.com/guides/what-is-blockchain-technology/

A Complete Beginner’s Guide To Blockchain
Bernard Marr focuses on real-world analogies to explain concepts like decentralization and distributed networks.
https://www.forbes.com/sites/bernardmarr/2017/01/24/a-complete-beginners-guide-to-blockchain/#2ad0b856e607

Don’t Understand Bitcoin?This Man Will Mumble an Explanation at You
Made me giggle.
https://www.youtube.com/watch?v=4APcgsRdW6w

Blockchain for Beginners
The second half of a talk from Andreas M. Antonopoulos about blockchain technology and Bitcoin.
https://www.youtube.com/watch?v=i9nUMvpT2rM&feature=youtu.be

How does a blockchain work
A great primer on blockchain if you’re kind of nerdy and want to hear more about things like hashes.
https://www.youtube.com/watch?v=SSo_EIwHSd4

Understand the Blockchain in Two Minutes
Great casual explanation of blockchain technology.
https://www.youtube.com/watch?v=r43LhSUUGTQ