Cryptocurrencies and Blockchain. What’s that?
Everybody is speaking about crypto or, at least, has heard someone speaking about it. There is a haze around what crypto is, and there is so much confusion and contradictory opinions about the current and future utility of crypto in society. Some say that all in the crypto world is a fraud, but on the counterpart, others say that crypto is the most promising technology revolution we are living in now.
Let’s make a very brief introduction to crypto, but before getting into this, let’s talk about the technology that makes everything possible: the blockchain.
A blockchain, in its simplest interpretation, is a ledger. That is, a registry in which all the transactions occurring between two parties are registered, stored. A ledger keeps track of the assets we own and all transactions we make with them. Humanity has been using ledgers for everything related to the exchange of value, and without them, all the daylife trading wouldn’t be possible.
Banks have their own ledgers to keep track of all transactions made by their customers, from a simple withdrawal in an ATM to a credit card purchase in an online store. So if a blockchain is a ledger, do we need blockchains? We already have ledgers. The bank has its own ledgers to track our money spending and income. To answer this question, let’s talk about trust.
In banks we (don’t) trust
When we buy something with a credit card or use Bizum to pay a debt we are generating new transactions. In every transaction, there are at least two parties: the sender and the receiver. The sender sends the money, and the receiver receives it, but this wouldn’t be possible without a third party assuring the transaction is feasible (checking the sender has enough amount of money in his account) and executing the transaction between the two parties (updating the resulting balances in the sender’s and receiver’s accounts). So in the world we live now, we need to trust a third party, we need a centralized authority, we need a bank.
But, what if we wouldn’t have to trust in banks? Could we build a system in which banks can’t control the transactions? Could we build a trustless system? This is the problem addressed by the blockchain, a ledger not owned by the bank, but a decentralized ledger.
A blockchain is a distributed system in which all participants are connected to each other forming a network (typically through the Internet) and have a copy of the entire ledger. That is, everybody has access to all transactions that occurred in the system. This seems a bit intrusive for people’s privacy, but the reality is that this is not because all our interaction with the network is represented by a wallet (formally a sequence of alphanumeric digits), and this wallet is not associated with our personal data (unless you intentionally share it). The idea behind this is that everybody knows everybody’s account state at any given moment in time, so nobody can alter their balance without noticing the rest of the participants in the network.
Technically, a blockchain is formed by a sequence of blocks with the registry of all transactions that occurred in the system, since the beginning. Every time a transaction initiates it is validated to check its correctness, and in the affirmative case, it is appended to the blockchain. The process of validating a transaction involves the participation of the validators, a set of nodes connected to the network that checks every transaction and updates the quantities involved in it to the blockchain. All the orchestration and communications between nodes are possible thanks to a consensus algorithm (see Proof-of-Work and Proof-of-Stake).
Is important to remark that once the block has been added to the blockchain it remains immutable, that is, it cannot be altered a posteriori by third parties with bad intentions (see the double-spending problem). This is possible thanks to cryptography in the sense that if one minimal part of one block is altered by someone in the network, all sequences of blocks connected to the altered part will be also altered, generating two incongruent versions of the ledger, and evidencing the bad intentions of someone in the network respecting the rest of nodes. If this happens, the less supported version is discarded and the other one is preserved.
Blockchains are trustless in the sense we don’t have to trust a third party like a bank, that is, a centralized entity, but the reality is that we have to trust in the network and in the independence of its nodes to conform a real decentralized system.
The first blockchain, the Bitcoin
The first blockchain was the Bitcoin blockchain, proposed by Satoshi Nakamoto in its paper. The Bitcoin blockchain was officially released in 2009, and the first transaction was made on 12th January. So, until now we have spoken about the blockchain and the ability to make transactions without the need of a trustworthy third party, but what can we transact in a blockchain? This leads us to the definition of cryptocurrency.
A cryptocurrency is a digital asset represented by a sequence of alphanumeric characters (commonly a token) that only have value inside its corresponding blockchain. The bitcoin (or BTC) is the native token of the Bitcoin blockchain, and 10 of these is what was sent over the Bitcoin network back on 12th January 2009 in the first crypto transaction. At that time, 1 BTC was worth nothing but at the time of writing 1 BTC has already hit the price of 60K$.
From there till now a lot of things have happened, and what was just a crazy thing originated in Satoshi’s mind, now is an emerging technology starting to force governments to take a position with or without the bankless movement.
Lots of new blockchains are constantly emerging in the ecosystem and new cryptocurrencies appear every day in markets. At the time of writing, the total market capitalization of the crypto ecosystem is higher than 1.5T$, evidencing that “the crypto thing” is not a fleeting concept in the craziest heads but a reality that has come to stay.
But wait… can we go even further?
A blockchain is not just a big distributed ledger, but also a big distributed computer. Let’s dive into the concept of smart contracts, Ethereum, DeFi, stablecoins, and the future of crypto in the following chapters.
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