Blockchain, Bitcoin and cryptocurrencies are exploding into mainstream news and consciousness.
The industries have seemed happy to cloak themselves in jargon and technical terms for years. Something similar happened with the birth of the internet.
There is much hype about Blockchain and cryptocurrency; people want to know more about this so-called world changer.
I’ve concentrated on my Top 10 Blockchain words, based on how best to understand the concepts behind Blockchain. (Cryptocurrency deserves and will get a separate Top 10).
I’ve split them into very rough categories, too, and so in an order that introduces you to Blockchain and its terminology.
Read my Good Block, Bad Block introductory blog for more.
The chain itself
Block: A bundle of transactions or bits of information that are added to Blockchains. Blocks have a limited capacity. Once full, they are added to Blockchains through after successfully passing mining.
Blockchain: By definition, Blockchain is a decentralised ledger. It records and stores an unchangeable and immutable history of all transactions. You can track the movement of anything that has been ‘put on a blockchain’. Each block is attached, or ‘chained’, to the next block using a cryptographic signature. Cryptocurrencies and any physical or digital asset can use Blockchain technology to record everything from ownership to money transfers.
Centralisation: Everything in a centralised network flows through a single being or entity. Facebook and Google are examples of centralised systems. Uber is centralised, too; all its messages and transactions go through its interface, and it takes payments and fees.
Decentralisation: Networks not controlled by a single entity; an example of a decentralised network is a cryptocurrency such as Bitcoin. With decentralised systems, no one person or entity has overall control of the network. A decentralised network stores an identical copy of the information on the computer of every person in that network. All these computers have a record of all previous transactions and blocks and verify new ones.
Decentralised Finance (DeFi): Decentralised Finance offers a fresh way to ‘do’ finance. It is potentially destabilising to banks and governments. The current banking system is centralised and closed, leaving 1.7billion people’ unbanked’ e.g. without access to a bank. Decentralised Finance would mean financial systems being used on Blockchain universally and transparently, with almost no transaction fees. It would open mobile phone banking and payments to billions of people.
Peer-to-peer (P2P): This involves two (or more) people communicating and interacting directly with no intermediary or centralised entity.
If I talk to you face-to-face, it’s peer-to-peer. If we email via Outlook, it’s not peer-to-peer (P2P) because Outlook operates as the centralised middleman. Turning that to finance, cash in hand payments are peer-to-peer (P2P).
A Mastercard payment is not P2P because the amount goes from my card via several banks and centralised networks before it reaches the vendor. Cryptocurrencies are P2P; if you perform the transaction yourself, there is no go-between, which is why hackers want bitcoin.
Mining: Miners receive ‘rewards’ for adding blocks to the Blockchain. Miners use programmes on their computers to solve very complex maths puzzles to add a block. The complex maths encrypts the data in a way that it’s almost impossible for anyone ever to hack in and change the information.
Lots of miners are competing to add a block at any one time — one bitcoin was worth $11,200 at the time of writing. Their computers are trying to find the one ‘solution’ to a puzzle that means they get to add the block. It’s like an enormous game of bingo — everyone takes part, but only one person can shout house and win the prize pot.
Mining is vital to cryptocurrencies. A miner receives crypto coin once they successfully add a block, adding more crypto coins to the circulation.
Miners are incredibly important. They help to keep Blockchain information secure and keep adding value, via more coins, to cryptocurrencies.
Proof-of-work (PoW): Once a miner completes a block, it is called Proof-of-work (PoW), an essential part of Blockchain’s security. So many miners are competing to complete the next block that hackers find it hard to break into Blockchains. They need more combined mathematical computing power than all the miners to stand a chance.
Smart contract: Vital to the flexibility humans require with data. Smart contracts are pieces of code to the Blockchain. They can instruct the Blockchain to execute out a task once certain conditions are met. For example, automatically giving your nephew money on his birthday, or paying a store only once they’ve delivered your goods.
Smart contracts adhere to code and not morals and are self-executing. Once its conditions are met, the transaction process is processed, no matter what the consequences or laws.
Token: One to watch, and already popular in the gaming industry. Tokens are virtual items tracked on a Blockchain.
A token demonstrates the ownership of an asset, be it oil or stocks. Tokens are unique, secure and easily transferable. With gamers, it involves scarcity — a wooden shield may be common and cheap. In contrast, a golden digital dragon would be worth more.