Cryptocurrencies for Dummies II - What's a Blockchain?

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What’s a blockchain?

Welcome to the second post in the cryptocurrencies for dummies series. Our goal in this post is to provide you with a basic knowledge of blockchain technology. Blockchains are the technology that make up most cryptocurrencies. They are made up of a chain of blocks that are linked together. These blocks contain a group of transactions, transaction ids, users, and other information for each network. Blocks typically contain many types of data that are pushed through and validated by the different users on the network.

Each computer on the network contains a copy of the blockchain. These computers are also called the nodes of the system. Imagine we have a spreadsheet with a bunch of numbers and names to keep track of transactions. In a centralized system, only the central authority has this spreadsheet, and outside users interact with it. In a decentralized system such as a blockchain, each user has a copy of the spreadsheet they use to interact with the others. Millions of users are typically connected as nodes in the blockchain network. This provides a sense of security because there can be no single point of failure. If a hacker wanted to exploit the system, he would have to change data in millions of computers at once all over the world which is exceedingly difficult.

A little deeper

Nodes on the network serve several purposes in the blockchain. Firstly, they typically are responsible for encryption of the network. Encryption provides the security needed by the data for the users on the network. Nodes also serve the purpose of consensus on the blockchain. Consensus is used to validate transactions on the blockchain and provide an incentive for people to participate. Users participating in this consensus are rewarded in the cryptocurrency they are working for. Many consensus algorithms have been developed, the most famous is the bitcoin “mining” algorithm that pays miners in bitcoin.

The original purpose of the blockchain was to create a peer to peer incorruptible system for transactions. This system allows for efficient transactions to occur without a third central party being involved at all. For example, when you go to the grocery store to buy some bananas, you use your debit card to purchase them. Before this purchase can go through, it must be authorized by the central bank. Most central banks of the world have the power to decline your transactions and cancel them if they want to. Blockchain-based currencies remove the third-party bank from the transaction. If you were to use the blockchain to pay for your groceries instead, it would go something like this. Firstly, you put in a request for the transaction to go through by proving the amount and the store’s wallet id. The transaction is sent to the blockchain, where other users on the network validate your id, the store’s id, and the number of tokens submitted. You will have successfully purchased your bananas once the transaction is submitted and verified.

This transaction could happen in several ways. The most popular way right now is a graphical user interface called a wallet. A wallet is an easy to use application that allows you to send, view, and receive tokens. Once your transaction is submitted from your wallet, it is distributed on the network. Every node in the blockchain (millions of computers) has a copy of the data for your and all other transactions.

A newer innovation in the realm of blockchain technology is the smart contract. Smart contacts allow for business logic to be integrated into blockchains. All a smart contract does is allow for certain events to happen when other events happen. For example, let’s say you wanted to sell some land to an acquaintance. A smart contract on a real estate based blockchain could help with this process. If the buyer signs the contract agreement on his side, the smart contract could automatically transfer the funds and land deed to the buyer. This eliminates a lot of the third-party inefficiency and provides a tamper proof ledger of real estate transactions and ownership rights.

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The potential applications

Smart contracts paired with blockchains and cryptocurrencies have so many potential applications in the world. It’s would be hard to go through all of them, so I will touch on just a select few. The biggest area that these technologies have the potential to enhance is the financial industry. Efficiently being able to conduct transactions all over the world and have a tamper proof ledger is extremely promising. Companies all over the world are starting to integrate this technology in the form of cryptocurrencies and other platforms for their finances.

Blockchain could have the potential to improve the economy of the world as well. Eliminating third party vendors from transactions could allow many independent workers and sellers to participate directly in the economy. Smart contracts could allow for smooth and secure transactions where all the money goes directly to the buyer. Marketplace websites such as eBay allow for this function, but they always take profit in the form of fees. Blockchain marketplaces would eliminate these fees and would allow for more peer-peer interaction.

Blockchain has also been slowly disrupting the supply chain industry. In an area where ensuring correct product destination and integrity are important, blockchain provides so much value. Vendors can verify that their product is indeed from the correct location, and suppliers can track where all their product goes. Transportation and logistics are just a few of the industries to be disrupted by this technology. This technology has the potential to change the world, so keep an eye out for new innovations coming out every day.

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I hope you guys enjoyed this part of Cryptocurrencies for Dummies. Blockchain technology is truly great, and it’s exciting to think about how it will affect the world. I would love to see everyone’s thoughts about blockchain and how it might change the world below. All resteems and upvotes are a major help to this project!

Click this link to go to part III of the series!
Cryptocurrencies for Dummies Part III

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