Blockchain 101: What Is Cryptocurrency

Understanding blockchain 101 and what is cryptocurrency

You might have heard that Cryptos are “unhackable”, secure or other characteristics, but let’s begin with the fundamental technology on our bitcoin 101 review of what is cryptocurrency

Blockchain 101 : Do you know New HTC phone allows users to run a Bitcoin full node

We will start by taking a look at what kind of blockchains there are and how they work. All types of Cryptocurrencies are based on a distribution system; therefore, they are often described as distributed ledgers.

Here the information is not saved in a single place, but on millions of computers in the network. Each computer saves either the full or only parts of the blockchain.

The most used form is the public blockchain, where everyone has access and can read and add information. Due to this freedom, this type of blockchain is usually the slowest version. Users are participating anonymously/pseudo-anonymously.

(The latter means that the user is anonymously active, but transactions could be calculated backwards to the end user; therefore, they are not 100% anonymous.)

The second possible type is a consortium blockchain discussed here on blockchain 101, which only uses specific crossover points for validation. As a result of this only participants of the “consortium” have access to the blockchain, this guarantees a faster process, and the creators can decide if participants are public or anonymous.

This form will be very interesting for business adaptions, which we will discuss and explain at a later point of this book in greater detail.

The third type is an entirely private blockchain; here transactions are validated by a certain amount of validators. The creator can decide who can add information or see it. This results in a very fast processing time, and the creator usually knows each validator.

You may question yourself, what is a blockchain or how can I imagine it. As the name suggests, the blockchain is a linkage of several blocks.

The speciality is that each block is generating code, based on the content it carries, which is saved in the consecutive block with other new information. But let’s look at an example, which might be easier to understand:

(Assuming “Peter lends Helen 50€”. The Block in the blockchain is saving this information and produces a code based on the order of the letters and numbers used – let’s say AAAAA.

If Helen would get access to one block and changes the information to “Helen lends Peter 50€” the outcome of this block would not be AAAAA, but BBBBB.

Therefore, the blockchain would directly show that some information has been changed, because of the error report of other computers in the decentralised network.)

The History of the blockchain is strongly connected to the history of Bitcoin; therefore, a lot of people confuse those two and might even take it for the same.

In 2008, Satoshi Nakamoto published the White Paper “Bitcoin: A Peer to Peer electronic cash system”, which is the foundation for Cryptocurrencies today.

Most Cryptocurrencies are based on the blockchain technology. This technology is based on four main characteristics.

Firstly, the decentralisation, meaning that the data is not saved on a single computer/server in an only place. On the contrary, most blockchains are saved on millions of computers simultaneously.

Because of that, the blockchain cannot be changed. Once a transaction is confirmed on the blockchain it is nearly impossible to change the saved information. (To change it, all nodes where the blockchain is kept, would have to be replaced simultaneously.)

The underlying principle is called consensus, meaning that the community has to agree on what happens and what does not happen. One way to reach this consensus is called “mining”. It is part of the proof of work system, which we will discuss in the next chapter.

Another critical point is transparency. In almost every Cryptocurrency, transactions can be tracked, and users can see who added blocks in a “proof-of-work” system.

In some cases, there also is a “Rich-List” stating the addresses with the highest amount of coins.

(This can be helpful to see how well the coins are distributed. This does not mean that people can see the name of someone! The only visible information is the public address.)

Lastly and probably one of the biggest threats to the old financial system – the transfer of values. While banks take one business day or even longer, depending on the size of the transaction and the destination, values can be shifted a lot faster with Cryptocurrencies. (10-30min, or even instant transactions are not rare anymore.)

Regarding this, the transaction fees can be 0, so that means the consumer does not need an intermediary. (Those points will be discussed at a later stage in more detail.)

Before reaching the functional part of blockchains, we will have a quick view on how the blockchain recognises accounts and how they are used.

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