This is the second chapter in a series of 6 chapters written to explain Bitcoins and other cryptocurrency. By the end of these chapters one should be able to understand, invest, and trade in cryptocurrencies.
Link to Chapter 1: https://email@example.com/what-is-a-bitcoin-5bac98b41423
Chapter 2: What is Blockchain?
It is being called the most disruptive invention of our times. It is what powers the Bitcoin and the cryptocurrency revolution. It is what has attracted the attention of every major industry leader and government across the planet.
It’s a very technical concept. Certainly not easy to explain. Even the more popular “How I explained blockchain to my grandmother” and similar posts are kind of hard to understand.
Let’s try imagining and breaking this down.
Imagine. The 90s and the popular family game of Antakshari. It’s a sing-along game. In this game, the next song to guess (and sing) begins with the last letter of the previous song.
Imagine, you are playing the game with 5 cousins. So, a total of 6 people are playing the game.
This game is built on a very simple chain process. The solution to the previous puzzle is used to make the next puzzle.
Now, let’s make this Antakshari game a bit harder. Let’s add a rule.
Not only should the next song (solution) now begin from the last letter of the previous song, but that solution song should also be from the same singer/artist.
Clearly this makes the game a bit more difficult. But, even now 3 out of 5 cousins are easily able to navigate through the game’s puzzles.
Ok. Now, let’s make this even harder. Let’s add another rule.
The next song (solution song) should:
1. Begin from the last letter of the previous song
2. Be a song from the same singer/artist
3. Be released in a random year that you thought of. This year that you thought of is also the key to your bicycle lock (a 4 digit number).
Wait! The 3rd point!? How would anyone know what year did you think of originally?
Well, everybody would have to guess now. Now the real puzzle to solve is the year that you thought of.
So someone will try and guess the solution song. Cousin Jain sings a song released in the year 2002. So, everybody listens to the song. Figures out the year 2002. And then verifies the answer on the bicycle lock.
They enter the code 2002 in the bicycle lock and *damn*…. The lock does not open. Everybody knows that this is not the right answer.
So the next player tries and sings the song released in another year, say 2006. They check it on your bicycle lock. Damn! It fails to open again. Everyone knows it’s the wrong answer.
So the next player will try and sing the son released in another year, say 2010. They check it on your bicycle lock. TADA!!! The lock opens.
Everybody can now see that this was the right song. It not only fulfilled the normal conditions of Antakshari but also is from the secret year that you thought of. The same year that would open the bicycle lock.
Now the next puzzle (song) also follows the same pattern, and the game goes on.
Great! Now you understand Blockchain. At a simple level.
Let’s rewind a bit to what a Bitcoin is. It is a decentralized, immutable, cryptography (encryption) based currency system where everyone can see and confirm what transactions took place.
How does everyone confirm the transaction? Why can’t people just modify Bitcoin transactions and cheat?
All of this is because of the underlying record keeping system called Blockchain.
Blockchain is a digital database that records entries in a publicly distributed and decentralized manner.
The beauty of blockchain is how it functions in a decentralized way. Everybody participates in the confirmation of transaction. Once a transaction is confirmed, everybody comes to know about it.
The graphic below explains how Blockchain helps to transfer things (in this case money).
Now, what is a block you may ask. It is nothing but the advanced Antakshari puzzle we looked at. It has a certain set of rules that verify the transaction that flows on it.
The transaction flow is verified like this.
In Antakshari terms:
1. The Previous Owner’s signature is the last letter of the previous song.
2. The Public Key is you singing the song and announcing the name of the artist/singer (and obviously the last letter of the song you sang).
3. The private key is the year that was also your bicycle lock code.
We can go more into technical details (the original paper on Bitcoin written by Satoshi is a great source to know more technical details, or just write your query in the comment section).
However, for our understanding from the point of view of a trader, we need to understand the concept of Blockchain.
It’s like everybody playing a game (Antakshari) and is racing to find out which is the correct random number (the random year you thought of. The bicycle lock code). This game is called mining.
A block is a collection of transactions that need to be confirmed (usually around 2000 Bitcoin transactions are there in 1 block). Each block creates a new puzzle to solve.
The first one to correctly find out the correct code wins the game, i.e. is the one to confirm the block. Everybody can easily verify whether the answer given is the correct one or not. How? They can enter that code in a mathematical function and check if the answer is right (the equivalent of checking if the code opens the bicycle lock).
The confirmed blocks — the ones whose solutions are verified by the community — are added to a chain of blocks. This chain of blocks forms a database of confirmed transaction blocks called the Blockchain.
The past records are maintained in this chain and can’t be changed unless the majority agrees upon it. At any given point of time there can be multiple blockchains (based on different solutions submitted by different people) pending for verification.
The community; and hence the official Bitcoin chain, only accepts the version of chain that is longest in length (i.e. has most number of correct solution blocks). Remember, a block is only added to the chain when it is solved by a miner and this solution verified and approved by the majority of the community.
The reward for successfully mining (winning the game by confirming a block) is 25 Bitcoins. This reward to the successful miner is for their help in confirming the transaction.
MINING IS THE ONLY WAY TO CREATE MORE BITCOINS. The total number of Bitcoins that can be mined is limited to 21 million
It takes a lot of processing power to figure out the right number. In the current system, solving 1 block requires a miner to guess 1 correct number out of 100 billion billion numbers (1 followed by 20 zeroes).
This takes specialized CPUs and a lot of computing power. This equipment (called as mining equipment) consumes a lot of electricity. In fact the electricity consumed for Bitcoin mining is equal to the entire electricity consumption of Slovenia.
They difficulty of the puzzle is adjusted periodically to ensure that one block can be mined (solved) in about 10 minutes.
Beauty of Blockchain:
It is a new way of executing things. Blockchain is like a new way of running the Internet.
One can transfer all kinds of things on blockchain — money, information, identity, contract notes. It is secured, very hard to hack into, and does not require a central authority.
Blockchain; and the transactions it executes and records, are very, very secure and elegantly decentralized.
Imagine not needing a central authority for any verification. No Bank to confirm transaction. No Government agency to verify your ID proofs. No Judge needed to establish if someone did a fraud with your money transfer or not. No central exchange to confirm if the stock market trade went through.
And now you can begin to appreciate the beauty of blockchain and the disruption of Bitcoins.
Next chapter, we’ll learn how to put a value on this disruption. We’ll take a look at the booming (and often busting) Coin trading market.
Chapter 3 — “Why do Bitcoins have Value?” is now available at https://firstname.lastname@example.org/why-do-bitcoins-have-value-48c0c2f00d0e
(The contents of this article are the personal work of the writer and written in his personal capacity. The opinions expressed in the article are author’s own and in no way reflect the views or objectives of the organization(s) the author may be associated/working with. For any comments, queries, criticisms please reach out to the author at “email@example.com” or write in comments below)