What’s a blockchain? – A brief crypto definition
What is crypto?
Traders today put a lot of attention on the monetary value of the fabled “internet money” called crypto. But before it became the exciting, high-stakes online investment it is today, people originally bought it because they were excited about the technology. That’s right, I’m talking about blockchain, the engine behind crypto.
You’ve probably heard of blockchain before and the first explanation probably didn’t take.
Don’t feel bad. It’s complicated stuff and most people have trouble explaining it without getting technical. Today I want to give you the crypto definition you need so you can understand the excitement surrounding this technology. Maybe you’ll also get some insight on how to choose the best crypto to invest in.
Crypto and the blockchain were invented to solve two major issues:
- Financial exposure to global market forces and inflation.
With an increase in global economic connections, currencies around the world have become increasingly affected by global market forces. These include market inflation due to controls like tariffs and rises and falls in major economies affecting investors worldwide. Some countries like Venezuela have experienced as much as 53,798,500% inflation since 2016.
- Growing fears surrounding security and privacy in online finance.
A wave of security concerns has come with the technological revolution in personal finance. Once financial data is exposed to hackers online, your whole bank account can become unsecure. On top of that, malicious entities, marketers, and governments alike can easily figure out your identity online through your purchases and intervene in malicious ways. They can cancel payments after they are made or cause you to accidentally double pay for an item.
Blockchain tech and crypto were developed to address these issues by letting people transfer money securely and without borders or regulation.
So what’s a blockchain and how does it make crypto work?
The blockchain can be simply visualized as a bunch of file cabinets tied together in a chain one after the other. Cryptocurrency is both the product of the chain as well as the incentive to get people to operate it and add more blocks.
On a blockchain like Bitcoin, each file cabinet/block stores data about transactions on the chain. In most cases, that’s simply who sent their crypto to who. One piece of paper in the cabinet stores the transactor and receiver’s wallet addresses, the amount transacted, and the time the transaction took place. On the Bitcoin blockchain, one file cabinet (or block) can hold about 1 MB of these data files.
When you make a transaction, the information goes into the newest file cabinet in the chain but your crypto doesn’t change hands immediately. Each cabinet/block and all the transactions within it must then be verified as valid for funds to actually move. Once your block is verified (usually in a couple short moments) three things happen:
- Your transaction and all others performed at the same time go through.
- These transactions are locked into the block where they can be viewed but not edited.
- A new block is added to the end of the chain and accepts the next round of transactions.
Verifying a block
When someone verifies your cabinet/block, they get a reward of Bitcoin. Right now, that’s a pretty appealing reward. As you might imagine, there’s a huge crowd of people eagerly trying to be the one to verify your block. Only one person can verify the block though, so the inventor of Bitcoin cooked up a reward-based system to decide who gets the privilege. It’s called a proof of work protocol.
Proof of work protocols
Bitcoin operates on a proof of work (PoW) protocol. In proof of work, you need to prove you’re working hard to support the chain to verify a transaction. Every time there’s a new file to be verified, a math equation is sent out to everyone who wants to verify your block. The first one to solve the equation gets the privilege of verifying your block and its reward coins.
However, there’s a twist. Those math equations get harder and harder as more of the Bitcoin supply is handed out as rewards. The rewards also become smaller and smaller after set numbers of blocks are mined. At first, each person could do the math equations on their personal computers. But these days, the math equations are so hard that you need a whole bunch of computers linked together to solve them in any reasonable amount of time.
Blockchain security – the “they can’t take all of us at once” model
Blockchains like Bitcoin are extremely difficult to break into and falsify data. No double payments or cancelled transactions.
Blockchains store a record of the original hash(or key) for each block when it is first verified and will automatically update based on the original hash, not a new one. Editing even one file changes the hash of the block and makes it stand out from the others. The takeaway, it’s virtually impossible for a change in a block to go unnoticed.
In our imaginary magic file cabinet, anyone can view the files locked inside without opening the cabinet. Viewing the data only reveals,
- the wallet address of the transactors,
- the time it was sent,
- the amount sent.
No other personal information can be seen.
If you want to edit these files to show false information you’ll need to get into the physical file cabinet. This is quite difficult the further down the chain you go. The key (called a hash) to the previous cabinet is always locked inside the next cabinet. You’d need to fish all the keys out of all the cabinets made after it to unlock one further down the chain.
But the blockchain makes things even more difficult. If you want to tamper with a cabinet further down the chain – let’s say last year – it’s not enough to get it open and change the file. You would then need to edit the keys for all the cabinets verified since then as well as all future ones as long as the blockchain is operating.
It doesn’t stop there. Everyone who runs a node (verifies transactions) on a blockchain has their very own copy of the blockchain accessible from their private node. Anyone can edit their own copy but the rest of the nodes need to vote whether or not they want your changes to apply to the rest of the blockchain. This makes the chain extremely secure. If a hacker wants to edit the entire Bitcoin chain for example, they would need to own at least 51% of the nodes.
So what if someone does own 51% of all the nodes? Can they edit the chain to do whatever they want with my crypto?
If a change drastically alters the nature of the chain, the original chain doesn’t change
Instead, a process called a hard fork occurs. That means there are now two blockchains. One follows the original protocol and one follows a new protocol. You can choose to branch into the new one or stay on the old one. Bitcoin has already forked some 105 different times, but the original chain is still alive and thriving in its unedited state.
If you want a simple crypto definition to impress your friends and relatives, then you can probably stop here. However, there are a couple more technical points that you should know as crypto expands.
The expanding cryptoverse
Blockchains don’t just store transaction data. Many people have found ways to store personal data securely and cheaply on the blockchain, like medical records or blockchain-based video game rewards.
There are also many different types of cryptocurrency with different blockchain protocols. Besides the classic proof of work model, a newer form called proof of stake (PoS) has recently gained popularity.
Usually in proof of stake(PoS) chains, there’s still a chain of file cabinets holding all the transaction data on the chain. But when a cabinet needs to be approved, imagine the decision instead goes to a big parliament hall and everyone who runs a node can vote on whether it gets added.
Not all votes in this parliament hall are equal. In PoS, the nodes with the most coins usually have the greatest sway over whether a transaction is approved or not. Every time a node uses their coins to vote, they receive more coins as a reward proportionate to how many that were staked. Often people like to pool their coins into a single node to gain more sway in the blockchain much like voting along a party line.
Often in a PoS blockchain, all coins are already in existence and distributed at launch. Sometimes, the organization behind the blockchain will mint new coins if they feel the need. Blockchain purists generally don’t like this though as they believe blockchain should be immune to inflation. Some examples of proof of stake coins include Ontology, Binance Coin, NEO, Dash, and Incognito.
Transaction speed and sharding
Lately, blockchains have grown longer and more nodes are needed for transaction verification. This has caused a drastic slowdown and an increase in transaction fees to hit the older blockchains.
One of the most common solutions for slow transactions is sharding protocols. This means breaking down blockchain processes into smaller pieces or “shards”. However, there is no exact agreement on how this should be done.
In a sharded Proof of Stake (sPoS) protocol, like in Harmony (ONE), verification is less of a parliament and more of an electoral college. Verifiers are placed in random groups (called shards) based on each node’s risk levels for trying to fraud the system. Each block just has to wait for a single shard to reach a consensus instead of the full chain.
Other sharding methods take place within the blockchain itself. In a planned update for PoW blockchain, Ethereum, developers plan to split certain types of verification among its different nodes. Each node will then verify specific types of transactions. For example, certain nodes will be designated for normal coin transfers while others will verify transfers for applications on the blockchain, and on and on.
One of the hottest debates surrounding blockchain tech is the level of centralization necessary in chain governance. In terms of governance, Bitcoin is a decentralized chain. There’s no organization running the protocol behind the scenes. It was simply created and then allowed to run autonomously via the general public.
The decentralization camp claims the sole purpose of cryptocurrency is to create a “democratized” money that cannot be influenced by the will of a small group of people. They believe it is the only way to ensure the integrity of the blockchain and ultimately drive adoption.
In centralized chains like Binance (BNB), an organization runs the platform behind the scenes. They add updates and often control a large percentage of the coins. This usually gives them the most say in block verification and chain updates.
The centralization camp argues fully-democratized processes slow down innovation on blockchains. They tend to believe blockchain tech will remain too slow and archaic to ever reach mass adoption without money-motivated organizations pushing the technology forward.
It is important to note that in practice, even Bitcoin cannot truly be called a fully decentralized crypto. The majority of the processing power used to verify its blocks are actually held in the hands of a few large-scale and high-budget mining operations giving them unequal sway on the chain.
As you can tell, there are countless factors to consider when assessing the hundreds of different types of cryptocurrencies and their blockchains. But whether you’re looking for the best crypto to invest in or were just curious, I hope this crypto definition helped make things a little clearer. And next time your parents or friends ask you “what is crypto?” you have something ready for them.
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