A 3 minute primer on Blockchain
Web 3.0 Magic? Not so much once you understand the fundamentals
They say that Bitcoin has become mainstream. Ethereum, Litecoin, and Ripple have also appeared on various media outlets; however, the majority of the focus is on it’s rapid rise in price.
While all of these belong to the category of cryptocurrencies, they each have specific use cases. What they do share is blockchain technology, which I will try my best to explain below in the most concise manner possible.
Blockchains are Distributed and Decentralized
An item in a network is said to be distributed if every device connected to the network has a copy of the item and works together on it.
A network is said to be decentralized if there is no need for a central source of control or trust.
Bittorrent and other torrent networks work on this model. Each torrent file is run by a host of computers connected to the same network with some computers working to upload the file and other computers using the shared power to download the file, to then upload it later.
Blockchains run like this as well, hence we call them networks e.g. Bitcoin Network, Ethereum Network.
Cryptography, Consensus, and Tokens
Bitcoin and many other cryptocurrencies run on a public network, one where all transmissions can be seen by all members of the network. In such a system, cryptography provides the security to make sure that the message is only seen by the receiver and not by any other participant in the network.
I’m going to skip going over cryptography (see article here for more details on it) and go into consensus. Consensus is when the machines in the network agree on adding a new block to the blockchain and in verifying transactions.
Doing such a task takes computing power — the machines have to perform calculations. In order to motivate these machines to keep performing these functions to keep the network running, they get rewarded in tokens such as Bitcoin or Ethereum, thus incentivizing them monetarily.
Smart Contracts and Vending Machines
I heard about this comparison from Tim Ferris’ podcast on the episode featuring Nick Szabo and Naval. Smart contracts are a core feature of Ethereum and contain code that executes when certain conditions are met.
Think of it like a vending machine: when the machine detects the correct amount of money inserted, it will release the corresponding snack. Applications of this for smart contracts are plentiful.
Understanding the core building “blocks” of blockchain provides a framework in evaluating not only cryptocurrencies, but other use-case scenarios for this transformative technology. I’m still learning more about this day by day. The following quote contains a great summary regarding the topic:
A blockchain is a distributed system using cryptography to secure an evolving consensus about an economically valuable token.
