July 09, 2018

Blockchain for Dummies: A Beginner's Guide

Welcome to the blockchain.

Now, what the heck is it?

First-time investors in cryptocurrency often want to know exactly what they’re buying into. Purchasing a single token is simple enough. Pay the price and get your bitcoin. What’s less simple is figuring out what you actually just bought.

This isn’t a used car lot. Before you sink hundreds, or even thousands, of dollars into intangible assets, it’s absolutely fair to ask what’s going on under the hood. Fortunately, while the technology is complex, the concept is pretty straightforward.

Cryptocurrencies are entries on a blockchain.

We’ll use bitcoin as our example, but this holds true for all cryptocurrencies.

A bitcoin uses what’s called “blockchain” technology. When you buy a bitcoin, say Bitcoin ABC, an entry is made on a digital database called the blockchain reflecting the fact that you now own this specific bitcoin. That’s what a bitcoin is, really. It’s a digital logbook, with an entry that says you now own it. 

Every time the bitcoin changes hands, the transaction is recorded. Each one of these recorded transactions becomes what’s called a “block,” and these blocks are linked in a chain. Together they create a record going back to when the coin was first created.

Think about it like a physical ledger, a book recording in permanent ink every transaction for Bitcoin ABC going all the way back to when it was first minted. You wouldn’t need to hold the actual object. The ledger would be enough to say “Liz owned this and sold it to Peter.”

Blockchains make your bitcoin unique.

So why is this special? After all, ledgers aren’t a new technology.

Well, it has to do with security and what’s known as the double-spender problem.

See, any digital asset has two problems. First, databases can be hacked. Even the best encryption can be beaten, which creates the risk that someone will simply change our blockchain to say “Liz owned this and sold it to John.” Liz and Peter might be ticked off, but the world would be none the wiser.

Second, it can be duplicated indefinitely. Without protections, there’s nothing to stop our hacker John from copying this database over and over again and calling each new one “Bitcoin DEF,” “Bitcoin GHI,” and so on. This is called the double spender problem.

We’ll talk about that first.

Currency, including cryptocurrency, only has value when it is scarce. Nothing has financial value if it can exist in infinite amounts. This is why governments fight so hard against counterfeiters. As long as only the Treasury controls the printing press, they can keep the dollar scarce and therefore spendable.

So if someone can just hit copy-paste on a blockchain database, what keeps them from creating infinite bitcoins? 

The answer is history. 

Remember, each blockchain records every transaction back to when it was first minted. That record is verified and verifiable. So a hacker certainly could try to copy/paste a blockchain and call it “Bitcoin DEF.” What they would get, though, would be a copy of Bitcoin ABC's history. When our hacker tried to spend that bitcoin, the network would identify the blockchain as the history of Bitcoin ABC, which the hacker doesn't own, and it would reject the transaction.

Think of it like our physical ledger. A hacker can copy that book all he wants, but in each case, it’s just a record of Bitcoin ABC’s transactions. Any buyer could just call up a previous owner, who would say “never heard of Bitcoin DEF, but I did own Bitcoin ABC, and I didn't sell it to John.” 

The blockchain network protects those coins from hacking.

Okay, so we can’t just duplicate the ledger. Why not just hack it then? What stops someone from simply hacking the ledger to say that “Bitcoin ABC belongs to John.”

The answer is publicity.

Each blockchain is monitored by a network of computers called “nodes.” Whenever you buy a bitcoin, that transaction is broadcast to the entire network for verification. The person selling the bitcoin provides a private key proving that he or she does, in fact, own it. As long as that key matches the one on the blockchain, the network approves the transaction and records a new owner.

The important thing is that all of that happens in public.

Every node on the network has a copy of the blockchain, which means that Liz’s ownership is recorded on hundreds, or even thousands, of individual hard drives. All of those nodes check and confirm each other’s work. If something goes wrong on one node, the rest of the network corrects it.

So hack away. For every database you hack, there are copies on thousands of other computers. The corrupted ledger will simply be corrected.

Think about it, again, like our physical book. Instead of a single book, blockchain works like a circle of accountants all sitting in a room watching each other. When one of them updates his ledger, every other accountant checks his work. If someone falsifies a record, every other accountant will catch the problem and correct it. It’s not enough to distract the accountant and falsify one book, you somehow have to distract every single accountant and falsify every single book at the same time. 

The blockchain is a public record of history. It tracks an asset back to the beginning and does so in full view. That’s what makes it work.

You can’t just copy a bitcoin over and over again. The database tracks Bitcoin ABC back to when it was first created. You can copy that database all you want, but it’s still just a record of who currently owns Bitcoin ABC. 

You can’t just create a new Bitcoin DEF. Each blockchain database tracks the token’s existence back to when it was created. If this token sprang out of nowhere, the database will reflect that and you won’t be able to spend it.

You can’t just hack the database to say that you own Bitcoin ABC. The whole network has a copy of this database. If you hack one computer to change the database, each other node will compare that ledger against its own copy and reject the change.

That’s what blockchain is. This system is an encrypted, digital database that is edited and updated in public view. That’s what makes it work, and that's what you're buying.

If all that sounds good, you can sign up for free and start buying your bitcoins with us!

 

Back to home