Blockchain: the Bare Bones

What’s all the hype about blockchain? Decentralized, Ethereum, proof-of-work are are words that are dominating the headlines. But why? And how does blockchain work? And how can complete beginners understand what blockchain is?

Although blockchain seems very complicated, the key principles are very simple.

In this article I am going to explain the 🔑 ideas of blockchain.

The word bank (something to refer back to incase I am using words you don’t understand).

Blockchain miners: add blockchain transaction data to the global public ledger of transactions.

Node: Is any computer that runs on the blockchain and has a full, updated copy of the ledger.

Cryptocurrency: type of currency which uses digital files as money.

Decentralized: an activity/organization/event/society that is controlled by several people/groups instead of just one person/group.

Third party: The unnecessary ‘middle-man’ which is a stepping stone between two places (ex: the bank)

Crypto token: represent a set of rules coded in a smart contract. Anybody can create a token and use it.

What is blockchain?

Blockchain is a digital ledger 📒 that keeps track of data in a decentralized, secure, stable way. There’s no twist.

Here’s an example:

Sally buys a 3 dollar coffee over the blockchain. Sally sends 5 bitcoin to the coffee shop’s safe, the ledger records who sent how much bitcoin to whom (Sally sent 5 bitcoin to the coffee shop), at what time (8:03pm), and will accept the Bitcoin if Sally sends enough money to cover the cost of the item, and will calculate the necessary change and send it back immediately. Now all Sally has to do is repeat the process and send more bitcoin to a delivery service’s safe, and she will be enjoying her pumpkin spice latte in no time!☕️

The blockchain eliminates third parties like banks, real estate agents and salespeople/stores (like baristas!), allowing direct contact with the person instead of wasting time and money going through an intermediary.

Blockchain is the driving technology behind cryptocurrencies like Bitcoin and Ethereum.

How does Blockchain Work?

Each piece of information on the blockchain ledger is stored in a block, and every block of information is connected (thus creating the term block-chain). When these blocks are chained together, their data can never be changed or edited. Every node gets a notification when a new block has been added to the blockchain.

Each block of data in the blockchain has three important sides:

1. The data that the block contains
2. The hash of the block
3. The hash of the previous block

Source from here

Data

This is the data which will be added to the blockchain ledger. It includes the transaction data, who sent what to whom, the time, place, etc.

Hash

The hash is a special key, like a fingerprint, that is unique to each specific block. A hash is simply a set of numbers and letters like this:

The hash is created when a new block is added to the blockchain. (Have fun making your own hashes HERE)

Previous Hash

The reason why the blockchain is so secure is because the hash of one block matches up with the hash of the previous block. So if someone were to tamper with a block, it’s hash would automatically change, and consequently none of the hashes in the whole blockchain would match up. This alerts everyone that a block has been tampered with.

As you can see from above, when the hash of block 2 is changed, it no longer matches the hash from block 3, and none of the blocks after that match up either.

How are blocks added to the blockchain?

There are 2 systems that add blocks to the blockchain:

1. Proof-of-work (PoW)
2. Proof-of-stake (PoS)

Proof-of-work

In a proof-of-work system, miners compete against each other to see who can solve a cryptographic puzzle first. The first miner to solve the puzzle gets to add the block to the blockchain and receives a reward (💰)

Proof-of-stake

In a proof-of-stake system, each person has to deposit a stake (security deposit) into a digital safe. The size of the stake determines who will be chosen to forge the next block. Once an individual forges a new block, they get a reward in return (💰)

Pseudo-anonymous

The blockchain is verifiable by the public, yet anonymous as well (it’s not as confusing as it sounds!)

Each person on the blockchain is linked to a public blockchain address, like a username. This is a cryptographic code that allows a person to send and receive funds from their account. Each blockchain address is unique and cannot be changed or hacked into. This is because of the digital signature that corresponds to a person’s account address.

Digital Signature

Digital signatures cryptographically link a person to a document which they signed. It is nearly impossible to forge a digital signature since each signature has a public key (the identity of the owner) and a private key (secret information that allows users to prove ownership of their public key.)

Smart Contract and dApps

A smart contract is a digital document that self-executes based on the code. It is basically a bunch of if-then statements. Here is an example of a practical use for a smart contract:

You are a landlord. You code a rental agreement, and send it over the blockchain to your tenant. That tenant would have to abide by the rules of the agreement (have to pay their rent by the decided time/day) and if not, then the smart contract would automatically conduct the appropriate ‘then’ code (maybe send a message to the tenant saying that if they don’t pay their rent in 24 hours they will be evicted). Let’s say that the tenant doesn’t pay their rent in 24 hours, the smart contract will execute the next ‘then’ code (maybe change the smart-lock on the tenant’s apartment so they can’t get in.)

That is one example of a smart contract (check out some other uses for smart contracts here).

Decentralized applications (dApps) cut out the middle man. They are like normal apps, but are decentralized and run on the blockchain. They are open source and operate by tokens. (Check out some crazy cool dApps here).

Smart contracts are a much faster, cost-friendly, and safer way of managing agreements/transactions. With dApps you can minimize transaction failure, and prevent hijacking or data loss. Pretty awesome, right?!

Uses For Blockchain

Check out what real companies in 2021 are using blockchain for:

• Banking
• Stock trading
• Personal identity/personal security
• Voting
• Real estate platform
• Retail industry
• Travel
• Charity
• Music industry
• Healthcare
• Drive supply chain
• As a communications tool for robots!

And so much more!

Digital Currencies

Bitcoin

If you thought that Bitcoin was a company, then you would sadly be mistaken. Bitcoin is a digital currency that fluctuates up and down just like a regular currency. Bitcoin is just one example of a decentralized digital currency on the blockchain (although Bitcoin is the most popular digital currency with around 45 million users a year). Bitcoin useses the proof-of-work system, which demands a lot of energy and money.

Source here

Ethereum

Ethereum is the second biggest digital currency which has around 4.5 million users a year. Ethereum is sometimes referred to as the ‘second step’ on the blockchain ladder, since Ethereum allows users to send smart contracts and dApps, while Bitcoin only allows money transactions.

Ethereum is more versatile, and can process more transactions than Bitcoin (Ethereum = 13 transactions/second, Bitcoin = 3–7 transactions/second). Ethereum is currently switching from a proof-of-work method to a proof-of-stake method, which will be more efficient and environmentally friendly.

Cardano

Cardano is ‘one step up the ladder’ from Bitcoin and Ethereum. Cardano uses the the proof-of-stake method, and since Cardano was created by one of the co-founders of Etherum, they share many similarities.

Cardano is highly scalable, processing over 250 transactions a second. Cardano is also one of the cheapest digital currencies on the blockchain; since Cardano doesn’t have to factor gas into the transaction price, the transaction fee on Cardano is very small.

These are just three digital currencies, but there are over 6000 digital currencies as of 2021! You can read the list of all the crypto currencies here.

Challenges in Blockchain

Before we can really use this technology, we need to solve the blockchain trilemma: scalability, security and decentralization.

1. Scalability ~ At the moment, Bitcoin can handle 3–7 transactions per second, and Ethereum can handle 30 transactions per second. This is nothing compared to 1700 transactions per second that Visa can handle.
2. Security ~ the >50% attack is something that could happen on the blockchain; when a person/group owns more than 50% of the tokens, they would own the whole blockchain. There are also holes in the system, so hackers could potentially hijack the network and control the transactions, or duplicate the tokens (the double-spend attack).
3. Decentralization ~ companies like Ethereum and Bitcoin use PoW mining, which uses vast amounts of electricity and energy. Often times there are also ‘mining pools’ where the top miners join together to mine a new block, and share the rewards equally. This makes the blockchain more centralized, since the people in the mining pool are controlling everything. It is also hard to moderate/shut down a decentralized system, since there is no central authority.

Conclusion (TL; DR)

Blockchain is a super epic technology that has the potential to accomplish so much!

• Blockchain is a digital ledger of who owns what
• Each block in the chain contains the block’s data (who sent what to whom, the time, etc.), a hash (unique fingerprint), and the hash of the previous block (making the chain almost impossible to break).
• Proof-of-work is the term used when miners compete against each other to mine a new 🧱️ block.
• Proof-of-stake is the term used when blockchain users elect one person to forge a new block based on the ‘down-payment’ each person placed.
• Blockchain is psedu-anonomus: each user on the blockchain has a public key (proving their identity to the public), and a private key (containing personal information and a digital signature)
• Smart contracts and dApps are systems that leverage the blockchain and eliminate third parties.
• Digital currencies like Bitcoin, Ethereum and Cardano are popular, but not the only cryptocurrencies.🪙
• Blockchain has many other uses than just transferring money.
• We need to solve the blockchain trilemma: scalability, security, and decentralization to access the full potential of blockchain.

If you’ve read this far, congrats on learning the basics of blockchain!🥳️

(P.S ~ Here’s some great resources to dive deeper into blockchain and crypto:

• I’m sure you’ve all heard of Satoshi Nakamoto…the brain(s) that made the whitepaper suggesting Bitcoin. You can read that mysterious whitepaper here: https://bitcoin.org/bitcoin.pdf
• Cardano overview lecture (long but worth it) https://www.youtube.com/watch?v=Ja9D0kpksxw
• How smart contracts will save the world TED talk https://www.youtube.com/watch?v=pA6CGuXEKtQ
• HotSpot: a really cool Blockchain company you should check out https://www.youtube.com/watch?v=iYCftPuVGQc
• The scalability trilemma https://aakash-111.medium.com/the-scalability-trilemma-in-blockchain-75fb57f646df
• Learn about NFTs https://www.youtube.com/watch?v=zpROwouRo_M
• How blockchain is changing money and business TED talk https://www.youtube.com/watch?v=Pl8OlkkwRpc&t=1s

ENJOY🔥)

My name is Rachel, I am a grade 10 student super interested in science, technology, making a big change in the world and cheese. If you have any suggestions for me, please don’t hesitate to reach out. I’d love to connect with you! You can email me at: runnerrachel.lee@gmail.com, or message me on LinkedIn. Thanks so much for reading!