Love it or hate it, blockchain and crypto are hot right now. The largest tech companies are exploring and/or working with blockchain technology. Investors are diversifying and giving a chunk of their money to crypto funds. Bitcoin is on everyone’s lips. If you’re just starting now in this field, here’s your comprehensive blockchain and cryptocurrency guide to understand this brave new world.
How does this blockchain and cryptocurrency guide? We’ll show you how blockchain and cryptocurrency work, what their advantages and problems are – and, to fair measure, we will show you where to read beyond this blockchain and cryptocurrency guide if you want to find out more.
It all started in October 2008, with a simple, elegant paper published on a cryptography mailing list. Signed by Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System” laid the principles of a new, groundbreaking system for creating a new type of “money”, as well as for storing and sharing data across a decentralized network.
Forget, for the moment, the mystery surrounding the identity of the author, and let’s focus on the unbelievable revolution that started on such a small scale. The paper was read and favorably received by that small community; the technology itself, i.e. the blockchain and the bitcoin, rolled out a couple of months later, in January 2009.
At first, Nakamoto was the sole operator along the chain; in time, at first slowly, then lightning-fast, others joined in. The benefits of the new system became obvious to the initiated user. But what, exactly, was this new system? Well, that’s what this cryptocurrency guide will explain Grab some coffee and let’s go.
The Blockchain Guide
Any blockchain and cryptocurrency guide will tell you there’s a big difference between what Nakamoto saw as “the chain of blocks” and “digital cash” and what we now know as blockchain and crypto.
Nakamoto’s ultimate goal was to create a new type of payment system that would bypass the existing financial regulators. But first, in order for the “electronic cash system” devised by him to be productive, it had to be built on a novel platform, something that did not resemble anything in existence. And so, the blockchain was born.
A blockchain is, quite literally, a chain of blocks. Not a network, but a chain, in the sense that the building blocks in the blockchain system are interlinked and each dependent on the one before, rather than randomly connected to other blocks within the system. The dependency simply means that each block must absolutely include some of the previous blocks’ information in its own structure.
The blockchain is most often defined as a decentralized, distributed ledger for recording data. In this context, decentralized and distributed mean more or less the same thing: there is no one checkpoint, no authority or decision-maker within the system, but rather the blockchain is so built that every node (i.e. user) can store the record, check its accuracy and contribute to block-building.
The major advantage of a distributed ledger is that there is no authority – and so, no one single point of failure. If someone tries to dictate code behavior to alter records or tip the balance in favor of certain users, they can’t: every node has equal say in running the system. If someone’s data goes missing, there is everybody else’s that’s still accurate. If someone’s system goes down, everyone else’s still stores and shares information. If someone tries to corrupt data inside the system, everyone’s records will show the correct data and override the attacker.
Any cryptocurrency guide will tell you cryptocurrencies need blockchains; what is even more important, though, is that the bitcoin blockchain, the mother of all, was designed merely as a reward-distributing mechanism that would incentivize people to join the network. In fact, this particular blockchain and cryptocurrency guide insists on pointing out that the origin story of crypto is a masterpiece of economic thinking, as well as of cryptographic simplicity. But we’ll come back to that.
A pause to clarify terminology: there is no one blockchain. There are blockchains that underwrite various currencies, that record contracts etc., and they are, unfortunately, generally non-compatible amongst themselves. Imagine the railways before everyone agreed on the same width and track gauge: the governing principle was the same, but you’d still have to change trains as you traveled out of England and into Ireland. Blockchains are sometimes created just to issue tokens to be sold through ICOs. You can read beyond this blockchain and cryptocurrency guide to see what ICOs are.
However, we can indeed lay down the basics of a blockchain along a few essential notions:
Block: a block is simply a bundle of data, composed of a few set elements, such as timestamp, hash of the previous block, record of transactions and, by necessity, the mathematical problem that needs to be solved in order for the block to be created and for the reward to be released.
It is this block structure that makes for a chain: each single block (with the exception of Satoshi Nakamoto’s very first one) contains a reference to the block before. This is in order for the system to make sure there is no double spending: “The only way to confirm the absence of a transaction is to be aware of all transactions,” states Nakamoto, so each transaction must refer to the previous one, and so on back to the very first transaction in the chain.
The solution to the mathematical problem, together with the fulfillment of a certain number of valid transactions, allows for the creation of this block; if two nodes arrive at the solution at the very same moment, the network works on the first one they received, “but save the other branch in case it becomes longer. The tie will be broken when the next proof-of-work is found and one branch becomes longer; the nodes that were working on the other branch will then switch to the longer one.” Nakamoto did think of (almost) everything. Read beyond this blockchain and cryptocurrency guide to see how Nakamoto envisioned the workings of the blockchain.
Hash: it is simply a mathematical function that converts an arbitrary number of characters to a set number of characters. It is a very useful function in cryptography (see now why Nakamoto used a cryptographic thread to launch his crazy idea?) and it ensures that even the slightest alteration in a string generates a new hash.
In the blockchain, each hash (i.e. unique set of a fixed number of characters) contains a reference to the previous block in the hash of the current block, as well as a “nonce”. A nonce, by the way, is simply a “number used just once”. The correct nonce, once found, will be validated by other nodes in the chain, which in fact will validate the formation of the new block. As Nakamoto represents it:
All this is to say: the hash is what makes the blocks unalterable. Once the previous block has been hashed, and the timestamp and other info introduced into the new hash, what comes out is literally irreversible. The number is unique and cannot be perverted in any way.
Proof-of-work: This is the standard consensus mechanism employed by several blockchains, Bitcoin first and foremost, to ensure network security and trust without the need for a third party, and to fairly allocate rewards. It literally means that the reward is allocated to the node that proves it has used its resources to correctly solve the puzzle in the timeliest and most satisfactory manner. There are other protocols for allocating the right to add blocks to the blockchain, which also comes with its crypto reward; the most popular of the alternatives is Proof-of-Stake. Instead of rewarding nodes, this one rewards cryptocurrency ownership, in the idea that those who own the most coin are the most interested in keeping the network running well.
Reward: Why go through the trouble of using up your CPU to store large amounts of code and solve extremely difficult mathematical problems? Satoshi Nakamoto devised all this underlying structure to arrive at the actual product: the Bitcoin, the mother of all cryptocurrencies. When you mine, i.e. when you solve the puzzle, you get Bitcoin – or whatever other crypto asset is created within that network.
In other words, the system is built so that the users’ participation makes the blockchain functional, but the blockchain structure also rewards them for participating along. A user on the blockchain is, for simplicity’s sake, a computer – or, in blockchain jargon, a node. Each node goes through the trouble of participating in this complex operation of actively supporting an entire system because at the end of the rainbow is the promise of reward, in the form of whatever cryptocurrency that blockchain promotes.
So, what actually happens is that computers compete to find the answer to the problem, and by so doing they help approve and create records of transactions. Once a certain number of transactions have been recorded, the block is “stamped” and goes out into the world. In the case of Bitcoin, for instance, it takes about ten minutes for a new block to be hashed.
If anyone tells you there is no downside to the Blockchain, see what they’ve been drinking and who’s been paying for their drinks.
- The first problem with any blockchain is sheer size. The Bitcoin blockchain, admittedly the largest by virtue of its being so popular and having been around for so long, runs in excess of 150GB. Who has that much room to spare on their home computer?
The answer is, don’t be naïve. Very few people actually run blockchains on their home computers; most have extremely powerful dedicated ASICs – or at least stacked-up GPUs – expressly for the purpose of mining cryptocurrency off these large blockchains. Read beyond this blockchain and cryptocurrency guide to see how mining is actually done.
This makes nodes very expensive to create and support and may easily create an imbalance out of who can afford such costs on a regular basis.
- Another problem is that the blockchain itself is not entirely hassle-, hacker- or error-free. It is, for one thing, not just costly, but also a time-consuming process. Blockchain-backed systems are not easy to build, audit, integrate or deploy; and blockchain transactions are not fast (to put it mildly).
- Blockchains themselves are relatively secure, but interfaces have also been hacked repeatedly, by various means, from bug exploitation to mirror websites, which highlights the constant need for better safeguards. They also sometimes fork, either spontaneously or deliberately. All this goes to show that they are not 100% stable, and, through error, employee fraud or maliciousness, can still be used to cause a certain level of harm.
There is yet another way that the blockchain could be perverted. The system is only secure, Satoshi Nakamoto observes, “as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes.” Starting from this preemptive position, a not-so-outlandish theory called “the 51% attack” outlines a different kind of vulnerability in the blockchain: if more than half of the nodes fall in the hands of a malevolent or merely interested actor, it could easily bring down the whole show.
While 51% sounds like a lot, and it is, it is still not impossible. Think how, even now, a number of rich, large-scale actors are benefitting from the blockchain technology. With a concerted effort and if the payoff were worth it, that would be a surefire way of compromising the integrity of the blockchain – or of ensuring that a hidden actor dictates results, which would be tantamount to having a central authority with questionable interests.
What any cryptocurrency guide will tell you, though, is that all of the above are no more, and probably quite a lot less, than the potential issues raised by any national or supranational authority, especially one that stores financial assets and essential records. If these problems scare you, you may want to also think about financial transactions in fiat currency (how many physical dollars are in circulation and how many are just digital zeroes and ones?), membership cards, online platforms, your physical wallet, your home security system, and many other tangible and intangible ways you could lose something important, from personal information to money and more. If we accept this quid-pro-quo on a regular basis as we do, it’s because there are more advantages than disadvantages, and this blockchain and cryptocurrency guide aims to expose disadvantages while explaining the upside of navigating these frenzied waters.
Even for the heaviest blockchain skeptics, there is one immediately apparent advantage: decentralization. In a market that is becoming increasingly frustrated with central planning and central authority, the possibility of a decentralized, censorship-free, fully transparent store of records (contracts, transactions, data in general) is a welcome opportunity. Some of those interested in decentralization might be those in countries with fraudulent authorities, opaque governments, or greedy corporations.
- If you thought the blockchain is only good for buying drugs with crypto on the dark web, read beyond this blockchain and cryptocurrency guide to find out why that’s only partially true. Blockchain-supported transactions might actually pay for freedom in the form, for instance, of fair journalism in countries where the authorities jail promoters of free speech. (Read beyond this blockchain and cryptocurrency guide to find out more.) An oppressive ruler could shut down a newspaper, a network or a platform such as Facebook or Twitter; unless it shut down internet access altogether, the blockchain would still be available and its records could not be altered.
- Another advantage is in providing a seamless, error- and corruption-free record of transactions across industries. This could change the face of supply-chain economics, logistics, medical and insurance record-keeping and more. The most recent example is a pilot program run on blockchain by IBM and shipping giant Maersk, with 94 organizations joining, plans to bring together and simplify the recording of the supply chain. This particular use of the blockchain technology is nothing new; several blockchain companies have been working with shipping companies to bring together wildly disparate data from suppliers around the world. Other real-life uses include storing and monitoring financial, healthcare, real-estate, and electoral records. Read beyond this cryptocurrency guide to see what blockchains can do in the real world.
With its capacity to incorporate everything from timestamps to actual contracts, digital signature, record of transactions and more, the blockchain technology has already tested its real-world chops and is extending its range of use. Chances are that the future will see improvements in blockchain performance and, consequently, much wider adoption.
A Cryptocurrency Guide
But wait, there’s more. Blockchains were created to support a new kind of “electronic cash”, right? Where’s that at, you ask?
Well, the short answer is, it’s there on the internets. The long answer is, things have expanded at a break-neck pace over the past few years, and the crypto landscape has changed quite a bit since Bitcoin was first minted (or mined) by Satoshi Nakamoto in January 2009.
If you’re reading this cryptocurrency guide, chances are you already know crypto is worth something and are perhaps trying to gauge exactly what. To start at the beginning, let’s define our terms.
Cryptocurrency is digital money. In more sophisticated terms, it is a digital asset that operates as a virtual form of currency, composed of lines of code and strong cryptographic encryption.
The difference between crypto and other types of money, be it fiat money or other kinds of digital cash, is that, with crypto, there is no trusted third party to supervise, monitor, verify or otherwise be involved in creating and transacting it. Crypto is a decentralized asset, which is created in fixed quantities by mining, i.e. solving a mathematical problem on the blockchain (see the explanation above). Or, once you’re done with this cryptocurrency guide, start learning about what cryptocurrencies are.
Let’s back up one step. If you’ve gotten this far with this cryptocurrency guide, you know cryptocurrencies are created by mining on the blockchain. As explained above, mining is the process of solving a complex mathematical problem, which involves finding a unique number, and validating a number of transactions on the network. As a reward, the successful miner is allocated a small amount of cryptocurrency. For the regular miner at home, the amount is usually very small indeed, and could barely cover the cost of electricity. On the other hand, nodes with an always-on internet connection, specialized graphical processing units and other essential hardware can do a lot more work and consequently hit jackpot more often.
Now that you understand how it’s created, what does cryptocurrency really look like, though?
It looks completely unintelligible to the layperson. Crypto is, in fact, code. Consequently, it simply looks like a set of lines of code, with if and else statements and all the syntax of C++, Java, Python or whatever coding language that particular crypto asset uses. The good news is that, unless you really want to get very technical and/or start mining, you don’t really need to know. In this cryptocurrency guide, we won’t get too technical about code and mining.
As a cryptocurrency guide intent on balancing all sides, we need to address the elephants in the room. Some of the problems of crypto assets stem from its success, and some from its very nature. Let’s tackle them in that order.
- As competition for rewards increases on the blockchain, the complexity of the problems increases, too. The systems are designed so that the creation of crypto cannot run out of hand. In a sense, that is good: there is no true inflation in Cryptoland, as there is in the real world. On the other hand, that means that the processing power you need to solve for crypto is likely to increase rather than decrease over time.
- Another problem that stems from the success of crypto assets over the past few years is node ownership. Remember how we said miners at home could usually only make very small amounts of crypto? That’s true. Still, while very small amounts of crypto could easily translate to quite significant amounts of USD, what’s better than small amounts of crypto? Well, large amounts of crypto. The more money is to be made, the more enterprises are joining the fray. There are enterprises and mining farms out there using a country’s worth of electricity resources; their processing power and node acquisition might easily throttle individual hopefuls.
However, in the grand scheme of things, that does not mean there isn’t money to be made by mining. It just means you might need alternatives, such as joining a mining collective, or you may also want to look into other ways of making money in the crypto space: trading, ICOs and investments are the most common ones.
- Price manipulation is also part of the same range of problems. Cursed with success, the crypto market now has to deal with a number of “whales”, i.e. entities that accumulate large crypto stocks and manipulate the market by giving buy or sell signals to their own advantage. What this cryptocurrency guide can’t cover, you can learn by digging just a bit deeper.
Now, by virtue of their design rather than their success, cryptocurrencies are also vulnerable from other perspectives. Not all of them can be covered in this cryptocurrency guide, however some are too big to ignore.
- A major problem, as we speak, is scalability. By their very nature, blockchains are becoming longer and larger – and therefore slower to operate. Verifications and complex transactions take time, and so deals might get delayed. While newer blockchains are nimbler and easier to scale, they still can’t quite reach speeds comparable to those of the existing financial institutions.
- One of the easiest problems to pinpoint for the layman is crypto-related black market activity. There is no denying that, for a long time, crypto has been the currency of choice on the original Silk Road and then on similar marketplaces. Its anonymous character is, naturally, the primary driver here. This poses problems on several levels. On the one hand, they lower the profile of crypto holders. On the other, they represent a constant challenge for federal authorities looking to regulate virtual money that enables drug trafficking, money laundering, and various other criminal activities to be perpetrated beyond their reach.
- As with any digital network, hacking is a constant concern for crypto holders. There have been a few major hacks over the past few years. Generally, funds, once stolen, cannot be recovered, as transactions are irreversible; but that has not happened all that much. Generally, the hacking victims were exchanges that did not run securely encrypted private keys. Some hacking victims had their lost assets covered by the crypto funds, or even ended up with some extra coins. But the threat is there. Nothing that lives on the internet is 100% secure. But then, nothing that lives off the internet is 100% secure, either. You can read beyond this blockchain and cryptocurrency guide to see how to stay secure.
- Volatility is also a short- and long-term concern. Think of the most famous pizza in the world: it was bought on May 22, 2010, for 10,000 bitcoin. Yes. Someone paid $25’s worth of pizza in ten thousand bitcoin. That, at today’s valuation, would be around $64,000,000. Volatility indeed. No blockchain or cryptocurrency guide can overlook this giant elephant in the very middle of the room, and no one can promise things will change. It’s just what you must learn to live with in the crypto world.
And here we come to the big WHY: the reason everyone’s hot for crypto. It’s made up of a bundle of features that you just can’t argue with, and they are:
- Crypto assets are secure. Considering that quite a few crypto exchanges, wallets and websites have been hacked, that may sound strange. And yet, when it comes to digital assets, crypto is the most secure you can be – if you and your wallet/fund take a few precautions.
- They are transparent. With your $5 bill, there is no way of telling if it’s yours, your brother’s or you stole it from your uncle’s waist pack. When you own crypto, you can easily prove ownership, and everyone can see and verify transactions.
- Crypto transactions are irreversible. For merchants, that’s an easy way to avoid consumer scams (buyer and reseller fraud is causing millions’ worth in retail losses).
- Crypto assets are pseudonymous. Widely considered to be anonymous, they are, in fact, nothing of the sort. With the right tools, transactions can be tracked. Some assets are easier to track than others (Monero and Dash, for instance, are much more difficult nuts to crack than Bitcoin). However, regular users have no such tools, and, unless you choose to reveal your identity, you can safely transact cryptocurrency without any visibility to the network.
- Crypto transactions are cheap. While there are fees, some of them go to supporting the miners, all of them are the buyer’s, and all of them are significantly lower than fees charged by official financial institutions.
- They are also international by their very nature. As most digital transactions, they are as international as the internet itself. Without a central authority to dictate terms, you are free to transact, whether in the U.S., Turkey, Indonesia or Nicaragua. Read beyond this blockchain and cryptocurrency guide to see why banks may be unsettled by this competition.
- Finally, and most importantly, cryptocurrencies are decentralized. Any cryptocurrency guide worth its salt can will tell you that centralization is not just philosophically bad, but economically risky and unsafe security-wise. Centralized control means one point of failure, either in ideology or cybersecurity. In undemocratic, poor or remote countries, or even democratic countries with certain restrictions (of civil rights, for instance), access to goods and knowledge may be severely restricted. In such cases, the possibility of using cryptocurrency to acquire uncensored goods suddenly makes a lot of sense. Without a financial institution or a central authority with the ability to prevent the transaction, users can buy or sell items that might otherwise never make it past the wall. The blockchain is amoral; you can buy guns, unfortunately, but you can also “buy” access to investment tools, knowledge and even survival.
If you take anything away from this blockchain and cryptocurrency guide, it’s that cryptocurrency makes a difference and may well change the world. Think about it: during its first year in existence, 2009, Bitcoin was not traded once. In 2010, its highest valuation was $0.39. In January 2017 it was less than $1,000; in December 2017 it peaked at almost $20,000. It now seems relatively stable, somewhere around $6,300+.
Anything strange there?
No, not really. It’s just the world of crypto.
While the SEC still rejects crypto, the world seems to embrace it at an increasing pace. Suddenly, Bitcoin is being listed alongside major fiat currencies, investors flood the gates and the internet is red-hot with the new buzzwords.
Suddenly, major players and barely out-of-the-gate startups compete to bring blockchain technology to the most profitable industries in the world.
For just a second now, as we look, the world seems flat; anything might happen, anyone might win the race, there are possibilities left and right. Come back to this cryptocurrency guide in a year’s time – the world will not have changed dramatically, but we’ll bet you crypto will be much hotter. And it’s not just this cryptocurrency guide that says so: depending on where you’re looking from, you could say that the USD has lost big to Bitcoin over the past 10 years; from $0.39 during the first year of trading to $6,200+ means the USD is doing much worse compared to the main crypto.
Even now is a great time to win big – or lose, if you don’t watch your step. But it is, for sure, a great time to pay attention and learn. And then play your hand.