Blockchain for Beginners

The Blockchain is a complicated topic with a whole branch of Computer science dedicated to it. It’s what’s behind the rise of a new type of currency — cryptocurrencies like Bitcoin, Ethereum, Litecoin and Ripple, and yet, at its core, a blockchain is just a store of records.

That’s really it! You can think of blockchain as a spreadsheet with three columns — a from column, a to column, and an amount column. The difference is that this record of transactions, which we will now refer to as a ledger, is not kept in a single place. Its kept on thousands of computers around the world. If a hacker were to try to mess up the ledger on one computer, the other computers (each with their copy of the ledger) would not be affected. This is the first property of a blockchain:

1. Decentralisation

One problem with the world’s financial system, as with most of our computer systems, is that there is a central point of failure. Want to steal a lot of money? Easy, just hack a bank’s computer. Want to snoop on other people’s emails? Simple, just hack into their email server. Of course, this doesn’t affect us much because there are companies that keep these systems safe and secure. But what if the government asks these companies to set up encryption backdoors that allow them to read your messages? Or to know what you are spending your money on?

This is a problem Satoshi Nakamoto wanted to solve when he created Bitcoin. Using the email analogy, if the email service is run by thousands of computers around the world, each working in unison but not knowing each other, there would be no company for the government to go to to ask to set up backdoors. There would be no central email server for a hacker to hack into because the emails would be distributed among several computers. But, Satoshi didn’t want to make an email service, did he? He wanted to create a currency. Money (digital money) is, in essence, just a balance in a ledger. So what if (somehow) someone were to manage to hack into every computer running the blockchain in an attempt to change their Bitcoin balance? This is where the blockchain’s second property comes in:

2. Immutability

Once a transaction is recorded on the blockchain, it is set in stone. It’s not impossible to change, but it is so hard to the point where it wouldn’t make economic sense to do so. The hacker would lose more than they would gain by trying to do so. This is made possible by a system of hashes which I will explain in a later post.

3. Peer to peer

It’s easy to confuse this with decentraliation. While a P2P network is a result of decentralisation, it is not exactly the same. Take the current financial system — if you want to send $20 to a friend in another country — the only options you have are banks, PayPal, Western union et al. What do these haves in common? They each involve a third party. The bank processing your transaction is going to take a slice of that money as a fee. Also, they will KNOW that you sent $20 to a friend outside the country. By using their service, you are essentially trusting them with your data, hoping that they won’t share it.

In a peer-to-peer system, there would be no third party to facilitate the transaction. Blockchain does away with a third party by a system of nodes and voting, things I will explain in later posts.

So you’ve reached the end of this article. By now, you should know the advantages of a blockchain. You may still not know what a blockchain IS, and that’s okay. By the end of the series, I’m sure you’ll have a better understanding of them, and how they run cryptocurrencies. So, cheers! And remember to subscribe!