2.2. The Bluffer's Guide to Cryptocurrency - How does Bitcoin & Blockchain actually work?

in #bitcoin2 years ago

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Introduction

Last week, I talked about the concept of money in the current fiat system before leading in to the underlying principles of why Bitcoin came in to existence. If you missed it, you can read up about it here.

In Part 2 of Chapter 2 of the Bluffer's Guide, I'll attempt to take you through a simplified version of the way Bitcoin and the blockchain technology behind it actually works. If you wanted to learn more about the technical side, there are plenty of good resources online but make sure you have some brain food beforehand (it can be a little heavy going)!

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Before I begin, I want to emphasise that this is a highly simplified version of what I have learnt from my own research and I'm sharing my learning with you. If you do know this topic inside out, be nice to those who are still learning about this (myself included) and we can grow together.

So with that said, brace yourselves, you might learn something! Shall we begin?

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Blockchain Technology

Blockchain is the underlying technology behind all cryptocurrencies in circulation and you will hear "blockchain" time and time again as this becomes more mainstream. So if you're going to invest in crypto, you will need to understand the basics of how it works.

It's just a copy and paste job right?

Hmmm... Let's start with something that we use every day - the Internet.

Pretty much all content posted on the Internet is a copy of the original file stored on the content creator's computer. For example, on Soundcloud, every upload is a copy of the original mp3 from the music producer's computer and the producer can create as many copies as they want on their hard drive by simply copying and pasting.

Some other examples include:

  • Videos on YouTube being a copy of the original video file
  • Articles written by bloggers are copied from a Word document (including this one)
  • Pictures uploaded to Instagram are copies of the photo files stored on your phone.

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If you want to create a digital currency using a copy and paste approach, then we only have to go back to the whole paper money printing issue we discussed in the previous chapter to realise that this doesn't work. The currency will be just as worthless doing that with a digital currency as anyone can just copy the original.

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So how can we overcome the copy and paste issue for digital currency?

Well, this is where "blockchain" comes in.

Everyone who is on the blockchain network can see how every single coin moves (and has moved) from one account to another. In other words, you have complete visibility of every transaction, instead of random copy and pasted coins from any which way. In fact, once you join a blockchain network, you can see straight away, every transaction ever made since the network was created.

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But surely the record of all these transactions can be corrupted, right?

Before we get in to the details of the technology, if someone does try to corrupt the record of transactions, the entire network will find out immediately and reject any corrupted records of the transaction. This makes it extremely unlikely that the system will be hacked or corrupted.

How's that then?

Any new transactions are collected together and put in to a filing system by the network. This filing system is called a "block" and, for argument's sake, a new block can be created every 10 minutes. When you connect all these blocks together, like links in a chain, you get the "blockchain".

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Impossible to hack...?

I know what you're thinking. Every 10 minutes... that's a lot of potential for hacking to occur!

Remember how I said that any new transactions are collected together and put in to a block? Well, it's not just new transactions but EVERY transaction since the network was created. For the system to recognise a block, it must match all previous blocks that have been in the network.

An Analogy - Your Own Company - Part 1

Let me paint you a picture of how this may work in real life with a fictitious situation.

Imagine you are the Managing Director of a company with 10 offices around the country (congratulations, you have a successful business... or do you?)

Each of your offices must have matching records of every product sold so that you can report accurate figures to the taxman. Otherwise you would lose track of what your business has sold and your business would collapse due to erroneous reporting to the finance people (gulp)!

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But don't worry, you're smart!

To make sure the records match in each office across your company, you told each office to keep their own records and employ a representative to check the transactions (blocks) of the other offices. This means the representatives can compare their records and decide by a majority, which one is correct.

However, before the representatives had their meeting, half of them decided to meet up beforehand to change their records. The swines!

Don't worry, we'll get them in "An Analogy - Your Own Company Part 2"!

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How can this be overcome in the blockchain?

Well, I'm pleased to say that there's an additional layer of security that is added to the blockchain. However, this is where it gets a little bit more technical so bear with me!

Not only must each new block match previous ones, but it must also match the NEXT block that is created and all other ones in the future too. Blimey!

To further increase the security of the system, each block AND each transaction has a unique code, known as "cryptography".

So, if a new block is created, it has to match not only the transactions from previous and future blocks, but also the unique codes for the transactions and the block itself.

What if the new block doesn't match the previous one?

Well, if a new block doesn't match all of the transactions, blocks and the unique codes, then guess what happens. The cryptography (unique code) changes and makes it a lot easier to identify the corrupted block.

An analogy - Your Own Company - Part 2

Going back to our fictitious company with its mischievous representatives manipulating records, you have managed to find a solution. And it doesn't involve firing the miscreants (not yet anyway)!

You decide that at the bottom of each page of records, each office representative will put all of the values of the products sold from that page into a complex equation and keep the answer in a safe place (your office).

Now, at the bottom of the next page, the representatives will add up the values again, but also use their answer from the previous page.

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This sounds complicated. How does this actually help with security?

Well, if your representatives now try to cheat the system, not only will they have to change the individual transactions, they will also have to make sure they get the same answer when they put it in to the complex equation. Not forgetting they would have to write the answer down and keep it in safe place (your office).

This would take weeks for them to make changes and add complications in to go to your office every time to edit the answer from this complex equation.

At this point, (I'd like to think) you'd realise there is something wrong due to unnecessarily long meeting times and a lot of representatives wanting to visit you to use the original copy of the transactions that are in a safe place - your office!

If you suspect any wrong doing, you would change the equation to generate a different value from each of your offices transaction records for safe keeping. Sounds a bit more secure right?

Oh and you may also fire the troublemakers (you are the Managing Director after all)!

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But the blockchain can still be hacked right?

I get it, security is a big concern. Despite this very advanced and highly secure method of "transaction management", there is a teeny tiny (and we're talking the teeniest of the tiniest) possibility for the system to be hacked.

But if I tell you what someone would need to do to actually hack the blockchain network itself, then you will realise that it doesn't make any sense to attempt it. Here's why.

It's not that no-one knows how to hack the system, but rather the computing power needed to do it would be greater than the computing power of the network itself.

When you consider the network contains millions of computers, hackers would need BILLIONS of computers. This means that the bigger a system grows, the more secure it gets, which is why Bitcoin is one of the most secure cryptocurrencies out there due to the size of its network.

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An Analogy - Your Own Business - Part 3

Let's refer back to your highly secure company quickly.

If someone wanted to cheat the system, they'd have to do an awful lot with these modifications in place. And as your company grows and becomes more successful, you open up more offices and it would take someone so long to modify the transaction records, it would be completely pointless when you think about the time, money and effort they would spend to achieve it. Whereas it would be far more easy to just do their job properly according to the system.

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Ok, let's take a time out as we went pretty heavy today.

It's difficult to explain what blockchain technology is in a nutshell and I tried to keep it as non-technical as possible. On the plus side, I did make you Managing Director of your own company!

I hope this puts you in good stead to understand a bit more about how blockchain technology works!

In the next Chapter, I'll be going through how to buy Bitcoin, along with the very important concept of security, exchanges and storing cryptocurrencies.

Now though, it's your turn.

Did you enjoy the article or find it useful? Is there anything else you'd like for me to cover before going in to Chapter 3?

I'd love to hear from you and if you learnt something new, feel inspired to do some of your own research or felt I didn't cover something well enough, let me know and when I finalise the pdf, I'll make it right!

For now though, take it easy and catch you soon!

Nicky

Contents

  1. Welcome

  2. The history and technology of Bitcoin
    2.1 How and why did Bitcoin come in to existence?
    2.2 How does Bitcoin & blockchain actually work? (you are here)

  3. Buying Bitcoin
    3.1 How to be secure online with cryptocurrency?
    3.2 What are wallets?
    3.3 What are exchanges?
    3.4 Where can I buy cryptocurrency?
    3.5 How to store cryptocurrencies?

  4. Definitions of common phrases

  5. Portfolio Management

  6. Cryptocurrency News Outlets

  7. Fluctuations in price

  8. Blockchain Platforms for Musicians & Music Fans
    8.1 Atom Collector Records
    8.2 Musicoin
    8.3 Channels
    8.4 Steemit
    8.5 Sola
    8.6 Minds

  9. Concluding thoughts

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keep them coming!! nice work, Nicky!

Thanks a lot man! Trying to piece together the next blog and reading the positive feedback is motivating me to get it done. I did intend for this weekend just gone but music making gets in the way sometimes :P

Great Work! I love how you use analogy to clarify your explanations! The level of vulgarization you provide is great for beginners and intermediate level users as well. Thank you for investing your time and efforts into this! The more people understand what the blockchain is, the more its popularity and usage will spread!


Follow Taphophilia on all platforms

"The world is a coffin, we are dead alive..."

Thank you @taphophilia! Yes always love telling a story to help explain things better and that intermediate users are finding it useful too :)

I agree with you completely about more people needing to understand this incredible game changing technology. I think it's trying to get people to care enough to do something about it.

It starts here :)

Went in heavy this time @samprock! Hope people find these useful for future :)

Hi, great post, worth a follow.

Thanks a lot @cryptoissweet! I'm glad you found it useful :)

For future viewers: price of bitcoin at the moment of posting is 7807.00USD