“You don’t have to buy a whole Bitcoin or a whole Ether… you can invest into a crypto even with a few cents”
- one of the most common misconception about cryotos
Over the past few years, Bitcoin and cryptocurrencies have had quite a few ups and downs. Each time there is an up or down, the occasion is followed by a multitude of chasers with “fear of missing out” (“FOMO”) or casual doubters thinking that virtual assets will go to zero. The reason behind the substantial divide in views – lack of understanding what bitcoin or its fundamental technology is.
As such, in order to bridge this great knowledge divide, the following will aim to explain ‘what blockchain is’ in very basic / fundamental terms.
As you plan on where your next move will be in the crypto-markets, don’t forget to follow our Distributed Ledger Technology 101 series penned by crypto-lawyer Joshua Chu and his team of specialists at the subscribe link provided. Your journey into Blockchain and Law begins here.
“Jan. 31, the Shiba Inu coin traded at $0.00000008. A $1,000 purchase could have bought 12,500,000,000 coins. The 12.5 billion coins would be worth $285,500 today based on a current price of $0.00002284 for SHIB.”
- Chris Katje, circa 6 October 2021
Component 1 | What is a Block?
A block is just a collection of data. In most cryptocurrencies’ cases, it is a collection of transaction records. For example, Bitcoin’s data is comprised of a list of transaction. Similarly, while Ethereum’s blockchain is also comprised of transaction data, Ethereum is different in that it also contains smart contracts.
Since the dawn of cryptocurrency many years ago, many altcoins has since sprung up with their blockchain containing data ranging from files, Wi-Fi usage records and more. All in all, a block will always be a collection of records.
Bitcoin’s record is known as a ledger due to the fact that it is a record of value changing hands between parties. To this end, it is noteworthy that blocks (as with anything on planet Earth), will have limits. As such, more blocks will need to be added overtime. In Bitcoin’s case, each block is typically comprised of up to 1,500 transactions (with slight variation from time to time).
Component 2 | What is Mining?
Whenever a block is full, it is added to the network. To do this, a process known as ‘mining’ takes place. In Bitcoin’s case (which operates on a proof-of-work model), a miner will have to prove the mining, thus enters the next component of blockchain, hashing.
Component 3 | What is a Hashing # Function?
Hashing is a mathematical function that operates on two fixed-size blocks of data in order to create a hash # code, which serves to connect two blocks within a blockchain. The values returned by a hash function cab be called hash values, hash codes, digests, or simply hashes.
In Bitcoin’s case, Bitcoin uses a SHA-256 hashing function. By way of reference, SHA is the acronym for Secure Hashing Algorithm.
Note: It should be noted that the changing of an input data for a hash will result in significant changes in the output. As such, it is quite unlikely for an alteration to be made without notice.
To this end, it should be noted however that the calculation of a hash takes time and energy. As such, it is in fact the hashing (e.g., mining) which has attracted negative attention in energy consumption.
Component 4 | Decentralization
One of the key attribute to bitcoin and blockchain is the word ‘decentralization’. To illustrate the point, whilst a centralized database meant that only one individual entity has the file (and only that individual will have the ability to change the file), decentralized means that more than one individual will have access and be able to change the data.
As such, in Bitcoin’s case, instead of simply having one individual with the master list of all transactions on the ledger, anyone (provided with sufficient interest) may review the blockchain and vote on its data. Conversely, any individual can mine crypto (subject to that individual’s local laws of course).
In this connection, in order to safeguard against mal-actors, this problem is solved by using asymmetric encryption cryptocurrency wallets. As to the incentive for the public to participate in verifying a transaction, it should be noted that participants are rewarded (e.g., through mining).
The Final Component | What is a Chain | Why is it called Blockchain?
Whenever a block is solved (e.g., via mining), a new block is added with the password from the last hash from the previous block being added to the new block.
As such, the hash of the previous block is used to calculate the hash of the new block (all within public view). As a result, a chain is formed.
From here, we can see why blockchain is usually characterized as being immutable as any attempts to alter the data on an earlier block will affect the rest of the chain. This is why data stored on the blockchain is characterized as being permanent and cannot be changed.
As such, blockchain is hailed as being the next generation storage medium for data (especially transaction), though this will not be great for secrete / embarrassing materials.
In conclusion, blockchain is in reality a form of distributed ledger technology which can be summarized into the following component pieces:
- Blocks consisting of data (e.g, list of transaction)
- Password / Hash of a Block (which is the subject of a mining); and
- Link (with each new block referring and containing the history of all previous transaction); and
- As all the blocks are linked together, a blockchain is formed!
“Blockchain is the tech. Bitcoin is merely the first mainstream manifestation of its potential.”
- Marc Kenigsberg, founder of Bitcoin Chaser
We hope you enjoyed the latest of our Distributed Ledger Technology 101 series. To stay tune for more content, hit the subscribe link provided. As a final reminder, the contents you find here are purely for educational purposes. If financial advice is what you seek, contact your financial advisor immediately. Until next time.
“Spend some time with Bitcoin. Learn it, challenge it, and use it. You can assume no government wants you adopting this system in any capacity, and for that reason alone it’s worth consideration by honest, moral, and industrious people.”
- Erik Voorhees, Bitcoin entrepreneur