Blockchain, Cryptocurrencies and Bitcoin for Dummies
Cryptocurrencies are digital currencies that are protected using cryptographic – encryption and encoding – techniques. Some examples that might sound familiar are Bitcoin, Litecoin, Ethereum and ZCash.
What is the Blockchain? What is a block?
The Blockchain is a public ledger system where all the cryptocurrency transactions are recorded. The “chain” is composed by appended “blocks”. A block is a piece of data that contains transaction information, a timestamp and a pointer – a reference – to the previous and the next block.
How does a Blockchain work?
The latest block records the most recent transactions. When a block is completed it goes into the Blockchain as a permanent database. This au tomatically generates a new block. Many different types of information can be added to the Blockchain.
Each block points to the next is referred to by its hash code – a hash is a way of encrypting a string (more on this below).
Is Blockchain secure?
Every time a block is created, the block record will be updated. This record is immutable and publicly accessible. The increasing amount of people that participate and join the Blockchain makes the system´s security grow constantly.
The system is secure by design, using an award system to motivate people to work on increasing this security.
What is Hashing?
Hashing is the process of taking some string and generat-ing a fixed length key-value associated to that original string. It is a security computational process. It is straightforward to generate a hash from a string, but an extremely long and difficult process to go back from that hash to the string. A basic example of hashing: hash(”whatever string”) <=> 76cfe1e6461e6799b93a
What is the algorithm used for adding a new Block?
The contents of a new block are “hashed” (e.g. encrypted). A random string is then appended to the block. This block is “hashed” again.
After having done so, the block is compared to the current difficulty level. Bitcoins are created at a certain rate which has to be constantly maintained. As the amount of people interested in obtaining Bitcoins is constantly growing this difficulty level is increased, with respect to time, in order to keep the Bitcoin creation rate constant.
If the new block does not react the set difficulty level, the process is started again. These mentioned steps will be “looping” until the block does meet the required difficulty level. When this happens, the block will be added to the chain and the system will be updated.
What is Bitcoin?
It is non-printed money that can be used to do online transactions. Like most digital currencies, it is decentralized – not backed by governments or controlled by banks. Its value has been exponentially increasing almost since its creation in January 2009.
What is Bitcoin Mining?
Bitcoin ´Miners´ can be thought of as the equivalent to notaries. The process of mining secures the bitcoin transactions between users. These miners will add bitcoin tran-saction data to the Blockchain as a way of maintaining a public ledger (by adding a block to the chain, as discussed before).
What is a Mining Pool and how does the Mining process create new Bitcoins?
With the increase in the number of Bitcoin Miners, it has become nearly impossible to single-handedly be able to solve a block.
A Mining Pool is a group of individuals that work together to solve the block. The rewards are split between the participants The portion of this reward obtained by each individual is directly related to their amount of work.
These rewards are translated into the creation of Bitcoins, which is the way of keeping the Miners motivated and subsequently increasing the security level of the system.
Brief comment on Blockchain and Cryptocurrencies implications
There are still many regulatory and legal issues to overcome. The fact of having a digital, decentralized, public ledger, such as the one exposed in this article, implies that many employees see their jobs at risk. The economic, political and social changes that will arise as a result of this system are incalculable and unpredictable.
Even though many people are specialising in Blockchain and cryptocurrencies, it is an area with a very high growth potential that is yet to be explored.