In 2009, the first successful cryptocurrency, Bitcoin, got to the Internet. Its basic characteristic is that no one can ever own, produce, fake, and control it. It lives its own life. (Anyone can own its coins (bitcoins) but not the entire network.) But how can that be? Each currency has its central bank, an institution that regulates the amount of currency in circulation, its price, the appearance of banknotes. Well, with little imagination, Bitcoin’s central bank is a technology known as Blockchain.
By definition in wikipedia, Blockchain is a special kind of distributed database that keeps an ever-expanding number of records that are protected against unauthorized interference both from the outside and from peer-to-peer themselves.
A simple explanation of what Blockchain is
To begin with, Blockchain is a database. In computer science, the term database refers to the place where information is stored. For example, product names and prices in the e-shop, YouTube videos, or Facebook statuses. Currently, the model of the so-called centralized database is used. That means you have one large data center with a huge number of hard disks and fast connections, through which a huge amount of information flows. The problem with this approach is clear. Destroy the data center and destroy the data. Of course, today most services use hundreds of data centers, so if one gets out of power, nothing wrong will happen. Users will simply be redirected somewhere else. However, it is fundamentally impossible to solve some problems of centralized databases.
The first problem with centralized databases is the fact that they give a lot of power to a small group of people. In today’s world, information means money. Who have thone, has the other as well. Big companies can use them for so-called targeted advertising, where robots track your internet history and try to get you into advertising to buy things you probably do not even need. Worse, if this collected information about you is sold to the government. They can then use it for spying. There are many options and the risk of abuse is high.
Let’s ask a question. What would happen if all the Bitcoin features were provided with such a centralized network? If all transactions, authentication, encryption were provided by a centralized system? Well, Bitcoin would not be too different from the classic fiat money we’re used to. So, except for one little thing. The bitcoin unit value would be zero because of no state behind it. Nobody would accept bitcoin as a payment, not to mention that Bitcoin’s running alone would be very costly.
The solution is decentralization
That’s why Bitcoin and 99% of other cryptocurrencies are distributed! It works thanks to the technology known as Blockchain. It’s a kind of distributed database that takes care of itself. There is no weak point in it. No place of attack. No one controls it. It does not need huge data centers and big companies to keep the technology running. On the contrary, it runs on millions of computers owned by ordinary people, “miners” who exploit cryptocurrencies.
“Blockchain is an indestructible network of economic transactions, which can serve in the future not only finance but essentially everything that has value. ” – Don & Alex Tapscott, the authors of the book Blockchain Revolution (2016)
The whole concept of mining Bitcoin (and other cryptocurrencies) is very interesting. Blockchain is a network in which security is a priority. All data is massively encrypted by a hashed algorithm. If you want to become a part of the network, you will offer some of the computing performance of your computer. Your task is now to find another block of transactions. How? You have to figure out its hash. As? So, you use your computer and randomly try different hashes. If you hit first, you will get a sweet reward.
The bitcoin blockchain is designed to search for one block for ~ 10 minutes. If extra miners are added, the difficulty of extraction will increase. So adding new computing power will not increase network speed. We stay on one new block every ten minutes.
What is the block good for? There are transactions in it. Each network node after extracting a new block checks these transactions, and if all of them are valid, the block is added to the longest chain. From here we have the name – Blockchain.
Blockchain is more complicated
How do blockchain transactions work? Basically very simple. Let’s say you want to send a transaction from wallet A to purse B. Every wallet has its public and private key. The private key allows access to the cryptocurrency stored in your wallet.
Great, let’s make a transaction. First, you have to find someone to send your coins to. Essentially, you need an address (or public key) of the recipient’s wallet. You choose how many coins you want to send to this address and create a digital signature with your private key, into which you enter details of the transaction (ie the address of the recipient and the amount of the converted cryptocurrency). The transaction is ready for submission.
Another block is used and your transactions are in it. Congratulations! Now, there are millions of computers from around the world who have to prove it is not fake. They will use your public key to do so. It serves to verify the digital signature you have pinned to the transaction.
Cool! The transaction has been verified and will be written forever in a blockchain.
What is the power of the blockchain? Imagine a document that is duplicated thousands of times throughout the network. This network periodically updates and distributes the document among millions of computers. Now you have a basic idea of how Blockchain works.
Blockchain information exists as a shared database. This way of using the network has interesting benefits. Because all records are shared, there is no center that would be vulnerable to hacker attacks. Sure, you can change a local copy of the document. But he will immediately reject the network. An eventual hacker would have had a huge computing power to really influence Blockchain’s operation. Additionally, all data is publicly accessible and transactions are conducted transparently.
Consider the analogy of a publicly shared document. I would like to conclude with a snippet of a book by William Mougayar’s Blockchain Specialist: “The traditional way to share data is relatively simple today. Send the Microsoft Word document to the recipient (for example, via e-mail) and ask him to make a correction. The problem with this approach is that you have to wait for the recipient to send the modified copy back to your mailbox. The document is locked until the other person adjusts it. This is how today’s databases work. Two owners can not edit the same data at once. This way, banks store money and thus manage transactions. They will lock your account for a while before converting, then update the other party and open access to your account. Blockchain allows both parties to edit a document at the same time, but there is only one version of the document. Interestingly, one document can manage an unlimited number of people on Blockchain, and the system can handle it. “