Blockchain: The Basics.
Cryptocurrencies: advantages, barriers and risks.
There is so much to learn in the cryptocurrencies/blockchain ecosystem. Innovation happens on a daily basis and it seems impossible to catch up with all the developments. At æternity we are very much aware that information about blockchain technology and the cutting edge tech concepts that it may involve may sound incomprehensible to anyone who is just entering the sphere.
This is particularly true for people who are not tech-savvy, but are interested in implementing blockchain use-cases in their business or simply want to understand "what the fuss is all about". It is usually difficult for them to identify the advantages, barriers and risks blockchain tech and cryptocurrencies entail.
We have therefore decided to start a series of posts, that explain the basic terminology and ideas from the small but exciting world of blockchain. They will be dedicated to anyone who has just stumbled upon the topic and does identify himself as a geek, IT engineer or hacker.
First, we would like to clarify that although it may sound complex, blockchain technology is not so difficult to understand (really!). You do not have to be a developer to realize the advantages of its main use-cases. However, in order get the most out of it, it is necessary to have a good understanding of a few basic concepts.
- Blockchains are distributed networks of nodes
Centralized networks (such as PayPal, Facebook, Amazon, Wikipedia, Gmail, YouTube, Skype and others) run on servers that are online 24/7. When we use them on our devices, we are using a graphical interface that visualizes information stored on these servers and allows us to interact with it (in some cases). For example, installing Facebook on a mobile device, does not download the entire Facebook database. It is simply an app that connects to the Facebook servers and extracts pieces of content that are relevant to us.
By contrast, the contents of a blockchain (usually - ledger of transactions) can be downloaded to any computer and is considered "public property". These identical copies of a blockchain are called "full nodes" and form distributed networks by being connected to each other. Using the network, information is frequently updated so that all copies have the most recent data (again, usually about transactions). Users can also use the same network to make/receive transactions.
These networks of nodes are not managed by a single private company, institution or group of people. They depend solely on the motivations of their users. These could be financial and/or philosophical. Since a blockchain usually provides the service of a global payment network, utilizing a cryptocurrency, it financial usefulness to users might be significant. Looking at the "philosophical" motivation, many people believe that such a system could be an essential counterweight to the global financial system (currencies and payments), which is centrally controlled by governments and companies.
- Blockchains are ledgers
We mentioned the word ledger above. Let's give a specific example. The primary function of the Bitcoin blockchain is to store immutable records for every transfer of bitcoins made in the network. Anyone can install a Bitcoin node on their computer (if it is technically able to run it) and have a complete and frequently updating copy of the ledger. Having an active clone of the Bitcoin ledger has advantages for the user (you can trust your on copy, not one provided by a third party) and for the network (every ledger updates only in accordance to the consensus rules and verifies the validity of the miners' work).
This distributed approach would be impossible to implement for networks like Instagram and YouTube, because they do not have "transaction ledgers" but need to store information such as images and videos. This makes the size of the data many times larger than what an average home computer can store. In addition, all user-generated data is usually proprietary - it is owned by the centralized entity that runs the network. However, there are several projects that are trying to apply the idea of a distributed blockchain to maintain social networks (Hint: Steemit!).
The most important idea to understand is that the main advantage of blockchains is that this special kind of distributed architecture allows us to use a network that can not be manipulated by governments, hackers, corporate monopolies or anyone else.
Actually, harming the network is theoretically possible, but extremely hard for reasons that we will explain in our next piece.
In the following posts we will describe the incentives that are imbued in blockchain networks such as Bitcoin and ensure the security of the network. Please add any comments or questions related to this article below. ∞
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