Blockchain basics. A primer on cryptocurrencies.
Introduction
As you may know, understanding blockchain can be difficult at times, with hundreds of buzzwords and jargon being found in even the most basic of explanations.
In this article, we’ll be looking at these terms one by one to give you the tools to navigate through blockchain-related materials in the future and get a better understanding of what they mean. The aim of this article is to make blockchain simple to understand and hopefully to inspire you to continue studying by yourself.
(Please note: This article will be going over the concepts, not the technical aspects, of blockchain. No prior computer science or programming knowledge is needed to understand the text.)
Blockchain basics
So, what is blockchain? At its core, blockchain is essentially a database, keeping track of transactions between users. Unlike traditional databases which are stored by a central authority, blockchain is hosted by numerous independent entities, who have to all agree (reach a consensus) on what transactions are valid. These are then committed to the “database” in blocks (a group of validated transactions packaged together), which are write-only, meaning these blocks can’t be undone or changed. This also means that these additions are set in history forever, viewable by anyone at any time.
I’m sure you can start to see the benefits that this would have for industries such as finance, where transactions are private and prone to fraud.
In fact, the finance aspect of blockchain was integrated from the very start, through the creation of the first-ever cryptocurrency, bitcoin.
As the entire chain is hosted by its participants, the inventor of blockchain technology, Satoshi Nakamoto, needed a way to incentivize people to take part and validate transactions. He did this by rewarding validators with bitcoin, which was done by solving a mathematical puzzle. The puzzle (finding a certain very large number as generated by the last validated block) was set to take 10 minutes to solve, giving ample time for invalid transactions to be found and rejected before the block is added to the chain.
Cryptocurrencies
Due to its immutable nature, updates to the code of bitcoin causes a “fork”, with the pre-update version continuing as a separate chain. This makes it difficult to make any major changes to bitcoin without significantly reducing its integrity. Some of the members of the initial bitcoin project came up with some improvements but saw the issues of forking bitcoin and decided to work on their own cryptocurrencies. The result of one of these projects was Ethereum, which currently stands as the second-largest cryptocurrency in terms of market capitalization after bitcoin. The main feature of Ethereum was that it allowed programs (called smart contracts) to run on the chain, which brought along many new features. Smart contracts are capable of automatically sending transactions without user input, as dictated by their programming. The utility this provides is best explained by the following analogy: you’ve bought a flight ticket through a smart contract, but the flight’s been canceled. The smart contract, upon checking a flight database (via an API call, etc) would then automatically refund the amount.
In a system where transactions are irreversible, providing buyer protection is an important factor for scalability and helped garner public trust for cryptocurrencies.
Like bitcoin, adding a transaction to the chain costs resources, which is paid for in ETH, Ethereum’s native coin. ETH acts like fuel for the network as it’s used to deploy smart contracts (known as paying a “gas fee”) and acts as a store of value in a similar way to bitcoin.
Ethereum today has brought about other interesting features, one of which is the creation of “tokens”.
Tokens
Ethereum Tokens are created through smart contracts and their characteristics are defined by their creators. Tokens are created via a contract, which is added onto the chain as a transaction. This costs a certain amount of ETH as a fee and allows individuals to create currencies/digital assets/vouchers for their platforms without having to go through the expensive and complicated step of creating their own cryptocurrencies from scratch.
For different types of tokens to interact with each other, a standard was required, which is where ERC-20 comes in. ERC-20 (Ethereum Request for Comment-20) dictates what properties tokens should have and how they should respond to certain queries. This allows them to interact with decentralized apps (dApps) so they can be used across the network. (It might be easier to think of dApps running on Ethereum as websites running on the internet).
Wallets and Addresses
So where are these coins and tokens stored?
Contrary to popular belief, your digital assets aren’t stored in a digital wallet at all, they’re all stored on the blockchain. What’s referred to as your wallet is in fact a set of keys, public and private.
A Public key is an address used by others to transfer the ownership of assets to you. (Purchasing something from you for example.)
A Private key verifies your ownership and gives you access to assets assigned to that address. (Similar to a login/password).
A private key should never be shared while a public key can be given out freely.
Both these keys are represented by a long string of numbers and case-sensitive letters (called hashes).
Summary
We’ve only managed to touch the tip of the iceberg of the (wonderful) world of blockchain, and we’ll be looking into some of the concepts mentioned here in greater detail in future articles. There are so many interesting cryptocurrency, token and dApp projects that have been developed, which we’ll also take a look at in our next blockchain article.
If you like these kinds of articles, be sure to follow the bitgrit Data Science Publication for more!
Be sure to follow our social media pages below to stay updated on talks and upcoming competitions!
