The Blockchain: An Explanation....
Updated: Jul 13, 2019
The most difficult part of the crypto world to understand is generally the Blockchain, the network on which cryptocurrencies operate. It's a complicated subject with many levels to it but I’ll try and keep this as comprehensible as possible. We’ll stick to the Bitcoin blockchain for this explanation.
In a Nutshell…
The blockchain is a historic record or ledger of all transactions (i.e. movements of digital coins from one person / wallet to another). The transactions are stored as information within ‘blocks’ and together multiple blocks form a ‘chain’, starting with the first transaction of all time (the "genesis block") and ending with the most recent. You can’t make changes to the blockchain once it's written, you can only add a new block to the end of it. Hence, the chain keeps growing as blocks are added. Think of it like spreadsheet with a line being added every time a new transaction occurs. You don’t change any of the previous lines, hence the spreadsheet keeps growing. It just lets you know 'who owns what' today and also 'who did what' in the past. The power is in the fact that the whole of history is visible and can never be changed.
Feel free to read that paragraph again, however before we continue I want to make clear that you don’t really need to know much about the blockchain if you don’t want to. Think about what you’re doing now, reading this blog over the internet. In the background there’s http and various protocols sending messages back and forward, but do we really know or care how they work? All I know is that if I click on a link or type a URL, it’ll do what I expect it to do, at least most of the time. The world doesn’t need to understand the blockchain in order for crypto currencies to succeed, just in that very same way.
Nonetheless, you guys are here for more detail!
So let's go a bit deeper. Firstly, the blockchain is public information. Anyone of us can download the entire Bitcoin blockchain, the official copy is available here and it's around 200gb in size at present. If you download it and run the software, you will be running what’s called a ‘node’ on the network. The reason we talk about Bitcoin being decentralized is that people all over the world have downloaded the blockchain and are running these nodes. The more people that run nodes, the more 'distributed' it becomes and the safer the network is. Why? Well there's 1000's of nodes at present, all storing a copy of the most current blockchain. Remember that the chain's history never changes, blocks only get added, so collectively they can easily tell if someone has tried to tamper with history. As time passes the number of nodes on the network increases and it becomes more secure as a result.
Importantly, once you are running a node, should you choose to, you can also become a 'miner'. Miners use their computing power to create new blocks of transactions. They then send these blocks to the nodes, who verify them and add them to the correct blockchain. Mining is a complicated process that involves solving complex mathematical problems, which is why so much processing power is needed. However, they essentially provide the power that allows transactions to occur. In return, they are rewarded with a small amount of the currency over time. Bitcoin mining has become a hugely competitive space and we'll go into more detail in a separate blog.
What's the Point?
The result is a robust, tamper-proof, transactional system owned by the public with no central person or company with responsibility for it. That’s the most groundbreaking aspect of it, all previous attempts to create digital money needed a banker or authority of some sort to verify that transactions are real. Now, node owners and miners collectively perform this role over what’s called a "peer-to-peer" network. You can go a lot deeper into the tech and if you are really interested I'd recommend starting with Satoshi Nakamoto’s original Bitcoin white paper, here.
The other real win for the system is that there’s no middleman required for transactions, banks or money transfer companies are not needed, so you can remove their unnecessary fees. It's also borderless, meaning that there’s no differentiation between sending coins across the street or across the world. In both cases you just set up a wallet on your phone or your PC which will have a unique identifying address. You then enter an amount and the recipients unique address and click ’send’. Note that you can send fractions of bitcoin, they don’t have to be whole numbers, it's OK to send 0.01 BTC to someone. The transaction is then added to the the latest block, everyone that runs a node will update the blockchain to reflect this, and somewhere in the world a miner will smile as they get a small reward for facilitating that.
Finally, let’s move onto the ‘crypto’ aspect of it. Why is called a cryptocurrency? The blockchain has an added layer of security built in based around ‘cryptography’, essentially mathematical encryption. This layer of encryption makes it impossible for anyone to spend or steal funds from a wallet that is not their own. In order to access funds, you need a special decryption code to prove that you own the wallet. This is called your "private key". Bitcoin wallet software will automatically store these keys for you and make it a seamless process but just be aware that this is what’s keeping your funds safe from theives. When asked to store ‘backup’ codes or phrases, make sure you do so, just in case. In the past it wasn’t so seamless and people who lost access to their private keys also lost access to their coins. Around 3 million coins are estimated to have been lost in this way; thats nearly 15% of the entire supply of Bitcoin. These coins exist and if you look at the blockchain you can see them sitting in wallets. But the owner will never, ever be able to access them without their private key. Imagine the torture.
One Last Thing...
That wraps up my (simple?) decentralized blockchain. Next we’ll look at a few other cryptocurrencies which have their own blockchains and how they differ, usually by adding some extra functionality. But to finish I want to flag one cool geeky snippet of info. I mentioned the first ever block created on the chain is known as the "genesis block". Well this block (see image below) has a message added by the Bitcoin creator, Satoshi Nakamoto, which reads as follows... “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks”. Essentially both a timestamp of the genesis date of Bitcoin and also a derisive comment on the financial instability that potentially led to the invention of Bitcoin in the first place.