Basic Intro


Well, what is it?

Blockchain is not a cryptocurrency, but rather it is a ledger that records all the cryptocurrency transactions. It is verified by cryptography and is open, secure and accessible by all.

So what makes blockchains so special?

It's all about trust... Commerce and majority of the industries we see today rely on 3rd parties & central authorities to:

  • Issue & control the supply of money

  • Verify transactions, and

  • Mediate disputes & fraud

This gives these parties a lot of power, in addition to raising the cost and risk of having a middleman to mediate.

So how can we make payments without trusting a 3rd party?

Welcome to the blockchain:

It can best be explained through an example. Let's say you have 3 friends, John, Mike and Bob, and you often pay for each other on excursions to avoid the tedious process of paying individually. Lets also assume that you do not have the greatest trust in each other, and because of this you end up settling in cash relatively soon. This exchange of cash every time you go out can be exasperating and so instead, you decide to track the transactions on a piece of paper and settle in cash at end of the month. So now you are able add and track all the transactions on the record, and at the end of the month everyone settles their debt. However, with this model brings a few complexities

  • Problem i: If anyone can add a transaction, what stops someone from adding a fake transaction? (eg. Bob adds "John pays Bob $10" several times)

  • Solution: Lets introduce the idea of signatures to solve this. Anytime there's a transaction that involves you, you would have to sign off on it for it to be "valid". In the example above, Bob cannot add "John pays Bob $10" without John signing off on it.

  • Problem ii: If we're settling in cash at the end of the month, what stops someone from incurring up a bunch of debt and then leaving before the month ends? Bob could owe you $500 over the course of the month, and then vanish when it's time to pay up.

  • Solution: Instead of settling in cash at the end of the month, what if we created a new currency? For hypothetical sakes, lets call it Blockchain Money. Let's assume everyone gets 500 BM's. Every time someone makes a transaction, it is recorded in the ledger and once it is signed off, the BM's are exchanged. Thus, when Mike pays Bob 10 BM, Mike's balance will decrease by 10, and Bob's balance will increase by 10.

Now we have a system where all the transactions are recorded in the ledger, only valid transactions are allowed and each time there is a transaction, peoples balances are automatically updated.

However, there are still several unanswered questions;

Where will the ledger be stored? Who maintains it and how can we trust that 'person'?

Welcome to Decentralization

Instead of keeping the record of transactions on a single computer (to avoid a single point of failure), we can rather keep a copy of the ledger on multiple computers . Everyone involved gets a copy and if someone wants to add a transaction, the two parties sign it and broadcast the transaction to the rest of the network. Once it is confirmed, then everyone else updates their copy.

This decentralized system is known as distributed ledger technology. The example mentioned above is known as the blockchain, as all these transactions are essentially split into blocks to make processing easier. These blocks are then chained together which creates an order of transactions.

With this in mind, some blockchains that have been created serve not only as a record for transactions, but also allow for other protocols to build on top of them via the use of smart contracts (we will touch on this later).

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