Learning Blockchain Technology — Where do I start?
There are many different ways in which it can be explained.
Read a few different answers on this Quora thread, as well as watching one of my favorite blockchain Youtube videos below. This is not my channel… I just think this guy did a really great job in breaking it down.
How Does a Blockchain Work? — Simply Explained
Below is my typed explanation of Blockchain Technology.
A lot of people may not realize that blockchain technology is likely to have the greatest impact on the next few decades… We may have thought it was social media or even artificial intelligence but In a way I don’t believe it is and here’s why.
Blockchain is the next generation of the internet as we know it… It’s a technology that has many applications and holds vast promise for every business, society and individual person reading this answer.
In order for you to understand Blockchain, I need you to understand how the internet currently operates. So, for the past few decades we have been living in what’s called “The Internet of Information”
When I am sending you a Word document, PowerPoint, Email or text message, I’m not actually sending you the original, I’m sending you a copy…
Which is great! This is democratized information.
But when it comes to financial assets, things like:
- Money
- Bonds
- Futures
- Intellectual Property
- Energy
- Music
- Art
- Voting
Sending you a copy is a really bad idea… If I’m sending you $100 its pretty important that I don’t still have the money…
This has been called the Double Spend problem by cryptographers for quite a long time. So today, we rely entirely on big intermediaries such as:
- Governments
- Social Media Companies
- Credit Card Companies
- Banks
These intermediaries establish trust and certainty with every transaction of value.
These intermediaries perform every type of transactional logic from every kind of commerce from authentication and identification of people, clearing, settling and record keeping.
Overall they do a pretty good job. But there are growing problems…
They are Centralized, therefore creating one point of attack that hackers continue to breach.
A recent example being Equifax, publicly revealing that 143 million identities were stolen from their servers, therefore completing the biggest hack in human history. The old record was set by Home Depot just two years previous where a hacker gained access to over 50 million credit cards in less than a day.
These intermediaries exclude billions of people from the global economy, for example, people that don’t have access or enough money to have a bank account.
They slow things down… It can take a second for an email to go around the world but it can take weeks for money to move through the banking system across the city, and they take a big piece of the action, 10–20% to send money to a different country.
They capture our data, our privacy is constantly being undermined and the biggest problem is that overall they’ve appropriated the largesse of the digital age asymmetrically.
We have wealth creation but growing social inequality.
What if there were not just an internet of information but an internet of value… Some kind of vast, global, distributed ledger running on millions of computers and available to everybody.
Where every kind of asset from money to music could be stored, moved, managed and exchanged all without powerful intermediaries. In other words, a native peer-peer medium, but for value. It’s called the Blockchain.
Before we dive into exactly how this innovative “Blockchain” technology works, I want to first dive into its first application, Bitcoin. By doing so, it will give me a chance to examine an actual case study in which this technology has already been implemented. Through this understanding you will be able to imagine ALL of the different possibilities and opportunity that Blockchain has to offer outside of Bitcoin.
So in 2008 the financial industry crashed, shortly after, an unknown person or persons named Satoshi Nakamoto created a white paper in which it developed a protocol for a digital cash that used an underlying cryptocurrency called Bitcoin.
This seemingly simple act set off a spark, that… well ignited the world. It either has people excited, terrified or otherwise interested in many places.
All Bitcoin is, is a digital asset that can be bought, sold or exchanged between parties over the internet with little to no transaction fees, instantaneously anywhere in the world. Because of this, Bitcoin can be used to store value just like gold, silver and other types of investments. What makes Bitcoin so unique is unlike those other investments Bitcoin also serves as a digital currency in which you can use to buy products, services as well as make payments and exchange value directly and electronically.
However, different from other types of traditional currencies, such as the USD, Bitcoin is a cryptocurrency. In other words, it can function as an international medium of value, meaning it is not jurisdictional, or Fiat therefore putting no limits onto its reach. Anyone that can access the web with the most basic of a device can now transact and exchange value internationally.
What a lot of people may or may not realize, is that it is (literally) 10 million times more flexible than our current USD cash system. Most people believe in order to buy Bitcoin they have to buy an entire coin. That is not true… Just like gold, you don’t have to exchange an entire gold bar for a loaf of bread… We have developed a system of cash/notes that break down the value of Gold into increments of one hundreds, fifty’s, twenty’s, tens, fives, singles, quarters, dimes, nickels and pennies.
When buying, selling or exchanging Bitcoin, the minimum or maximum amount that one can exchange hardly exists… Therefore, I do not have to send an entire coin to transact with someone, even if Bitcoin’s price is at $10,000 dollars a coin, you can buy and exchange one dollar’s worth, or even a tenth of a penny’s worth! In fact, how I got the literal “10 million times more flexible” number is that a Bitcoin can actually be broken down into one hundred millionth of a coin. It’s called a Satoshi.
So, when you send Bitcoin to someone or use Bitcoin to buy anything, you don’t need to use a bank, credit card or any other type of third party intermediary. Instead, from your mobile device or computer, you can send Bitcoin directly to another party over the internet and it will arrive securely, almost instantly without being observed, analyzed or charged to the extent of our current digital payment systems. Think of it as the cash of the internet, except instead of physically handing it to someone we can now exchange it at the simplicity level of an email or text message.
So how does this thing actually work? How are these transactions processed, and confirmed and what’s stopping someone from manipulating the transactions, such as hacking the network and sending themselves a million dollars? Is it owned by someone? How does it just “run on its own with Blockchain?”
Bitcoin is running on the Blockchain, for a second I want you to also imagine any other digital asset from music to energy are also ran on the Blockchain. With Blockchain the validity, integrity and transactional information are NOT centralized and controlled by one group, in one place, like a bank or credit card company… but instead posted live to a network that is operated and validated by millions of people called miners.
The case study I like to use to explain who these “miners” are, and how the Bitcoin network functions is, the taxi business. It was once a giant corporation, but with massive restrictions on scalability due to overhead costs of vehicles to provide for drivers. This industry was dramatically disrupted by Uber, a decentralized network of drivers with their own vehicles, time, resources and energy to provide service for the Uber network in exchange for money.
The only job of Uber is now to process, validate and confirm transactions and pick-ups. The system is now set up as a decentralized incentive structure for drivers to now earn as they drive therefore saving these transportation companies billions of dollars. This beautiful business model revolutionized the industry by decreasing the overhead cost through decentralization of its operational infrastructure.
With Blockchain, the decentralized technology instead disrupts the financial industry, and many others that serve as middle men of transacting value.
With the application of Bitcoin for example, think of the mining process as a decentralized opportunity for people to connect, verify and validate transactions for the network, in return they are INSTEAD algorithmically rewarded with Bitcoin.
Notice what I just said, the only difference in this disruptive decentralized example is that instead of being rewarded by Uber, a central authority that still costs billions of dollars to operate. Miners are rewarded by the network protocol in which it functions on. It is literally an autonomous incentive structure with the reward of limited, digital coins that can be exchanged for any national currency.
Therefore, resulting in a payment system that costs one tenth of what it costs to operate our current digital payment systems.
Under the hood, this incentive system is very strict in its progression. In other words, the only way for miners to make money at all is to connect, verify and validate the integrity of every transaction. Working for the network in a positive way is really the miner’s only option or else it’s dishonesty or scheming cleverness will instantly be noticed and corrected by millions of other miners in the network.
Let’s say you wanted to work against the other miners, and “hack” the network to let’s say make a false transaction or double spend to somebody.
You would be working against the Blockchain’s progression of the honest miners, the people doing things correctly. Think this is easy? Well… it’s not. These “honest miners” that are moving the network forward, combined, have 100 times the computing power of all of google worldwide. Meaning you better own not just one multimillion dollar super computer, but 100’s of them.
Think of miners as the drivers for Uber. They have their own equipment, resources and time to spend operating the network but earn based on the energy that they produce for the network or in other words the amount of transactions that they verify and validate.
Most Blockchain applications would work in this manner therefore creating a new world of decentralized innovations on the way that we exchange any type of value today.
Citations:
https://www.fool.com/investing/2018/01/10/the-basics-of-blockchain-technology-explained-in-p.aspx
https://www.lifewire.com/blockchain-explained-4150034
https://www2.deloitte.com/ch/en/pages/strategy-operations/articles/blockchain-explained.html
https://www.dailydot.com/debug/what-is-blockchain-explained/
