Blockchain is the name of the technology, but more than just a name it partly describes the two core components; Block and Chain. Information within the Blockchain is stored in ‘Blocks’, these are groups of data chunks which are numbered.
You might imagine that ‘block one’ is the very first set of data for a new Blockchain. Second part of the Blockchain name, ‘Chain’ refers to the sequential numbering for each of these data
blocks – they are ‘chained’ together.
Looking at Blockchain in a straightforward way, it is a database made from sequential groups of data.
Initially, the best way to view Blockchain is to look at it like a database. Like any databases, this physical entity resides on a server, or node if you will. People or applications who wish to use this
data sends queries to the Server and in return, the Server responds with the information requested.
In the real world for databases which provide data to large numbers of people or over geographically dispersed locations operate not with a single node but with a multi-node model. This allows data to be retrieved swiftly from the user’s location and also provides performance because there isn’t a million people accessing the same server at the same time.
These separate servers synchronise their copy of the same database to each other, this means that at any given time each server has an up-to-date copy and version. Imagine how the ATM network works, it’s the reason you can go to one ATM machine and withdraw an amount of cash, immediately go to another, and your new balance is reflected precisely and effectively immediately.
Core to Blockchain is encryption. Encryption is the foundation and fundamentally the system which makes Blockchain immutable, unchangeable and therefore tamper proof. Once information has been written, this data in its numbered block exists forever and be queried at any time.
Within Blockchain each block is broken-down further into small units for each type of data. For example, there are types of units for transactions and there are types of units which might hold
balance in the case of Cryptocurrency.
Using the example of cryptocurrency, a given balance or ‘account’ resides within an address. This address is what is used to view the current value of that account. This account is encrypted and only the person on entity which holds the keys to this address can modify its contents.
Once its contents has been modified, this new set of current information is written to the most recent block number within the blockchain and is a permanent record.
Incidentally, the system of sequential blocks provides the mechanism whereby historical information is kept, so in our example of a Cryptocurrency address it is possible to view every transaction and balance over its lifetime by simply querying the oldest block first and stepping forward numerically across the remaining blocks to form a holistic three-dimensional perspective.
The technicalities of Cryptocurrency are indeed quite surprising. Once your understanding reaches a few levels you begin to see how it differs from traditional currencies like the US dollar (USD), Great British Pound (GBP) or Euro (EUD). In order to learn this, we must first understand the two types of Cryptocurrency.
Within Cryptocurrency there are either ‘Framework’ coins or ‘Utility’ tokens. To understand the later we must first explore the former.
In order for transactions to be completed within the Blockchain, there must be computational resource in order to process these functions. Although the programmatic code intrinsically exists within the very core of a Cryptocurrency to manipulate inbound data to do X and Y, fundamentally the code must run and for this compute is required.
Because there is no central or single organisation which funds and runs a given Blockchain (with, to a degree one exception which we’ll go into later) this compute must exist somewhere else no transactions could occur on that Blockchain – All pretty logical right?
Now, this is where the birth of Cryptocurrency essentially begins. For a particular coin such as Litecoin for example there are a finite amount of Litecoin coins which are possible to exist. At Day-Zero of Litecoin inception, no coins existed.
To obtain these coins individuals need to ‘mine’ to find them. This entails running intensive calculations to effectively crunch numbers and with the law of averages you will find X number of coins of Y period of time, using Z amount of local compute assigned to said calculations.
Your reward being coins from the Blockchain you’ve mined from.
The point of all of this, is the product of miners performing these intensive calculations is that they are also performing the processing required in order to fulfill the Blockchain transactions – the Blockchain has its compute!
But you may well be thinking “Hang on a minute, how does this translate to Bitcoin being worth $5,000 a coin?”, this is the best question you could ask. Two things essentially create ‘value’ in the context of Bitcoin; scarcity and agreed value.
There are only so many Bitcoins and as each one is mined, there is one less to ever be found. This by its nature creates scarcity – once coupled with demand this creates value.
Just like any other asset of value, take for example Gold. Gold is just a metal, but because there is scarcity and there is a demand Gold holds value, this value is indexed by a traditional Fiat currency and voila! An ounce of Gold is worth X dollars.
Bitcoin in concept isn’t much different except its natural utility is that it can store value (its balance) in an un-hackable, un-editable database which can be proven to anyone at any time. In reality this is the big-sell of cryptocurrency – It’s a way of an individual or organisation holding value themselves and not through a bank or some other physical asset.
Here’s where things get a bit more complex, hold onto your hats!
Some Cryptocurrency coins are not actually coins but are what’s referred to as Utility Tokens. Typically, Utility Tokens are used to consume a service within an Application that runs on Blockchain. Specifically, an application native to a single Cryptocurrency framework.
Tokens cannot be mined and all Tokens which ever will exist are distributed at the start in ICO stage (Initial Coin Offering), vaguely similar to an IPO with stocks.
With a token, often after the ICO any tokens which remain are ‘burned’ so that only tokens which have been purchased or specifically held by the creators will exist.
Tokens can only ever be bought by using the Framework Cryptocurrency. For example; Ethereum is a framework and is a platform where an application can create its own Tokens. The name and specification for this is ERC20.
There have been great pains with Tokens and regulatory law. Most notably within the US and around the question as to whether a token is an actual asset.
The ‘value’ of Tokens is held with scarcity and the fact that these tokens are required to use the service inside of the application.
Previously we discussed addresses on the Blockchain which hold the balance statement of an account. In Cryptocurrency this is called a wallet and much like your physical wallet holds your money, a Crypto wallet holds Cryptocurrency.
Similarly, this is a unique number in the way that a bank account has an associated unique number.
Wallet address are most commonly hexadecimal numbers, but not always. The actual digits used are not import, but uniqueness is.
The technical fact is that each wallet can only be written to with the private encryption key that created the wallet. Once on the Blockchain an individual, organisation or application has visibility of the wallet contents but has no means to modify its contents.
In the most simplistic form typically an individual might access one of two wallet types; offline and online.
An appropriate application is used to provide visual access and functionality to the wallet perform transactions. This might be a Windows, Android, apple or even web browser app (the actual application is not typically fundamental to the process).
You can almost imagine that an offline wallet is kin to storing your money under your mattress.
An online wallet refers to a scenario where you access an online Crypto service whereby you store currency in a managed platform.
An example of this is an exchange. Technically, once you sign-up and use the service for a given currency an address is generated for you for and you access it, for all intents and purposes this is your wallet.
The key distinction here is that the exchange holds the private keys, the classic discussion is that should the exchange cease from trading or are hacked your currency could be lost.
The general advice is to never store more currency then required in the exchanges for exactly these reasons – bad things do happen and there are unfortunately many examples of this, and people have lost money.
You can imagine that an online wallet is akin to a bank account from the high street.
Now we have a shiny new wallet for a Cryptocurrency of our choice, and we want to transfer either some of these coins into another Crypto, another Crypto into these coins of indeed place Fiat in or out.
How and where to do this is straight forward but depending on the reasoning and outcome one method will generally be preferred over another, however all methods use the same concept.
How Cryptocurrency Exchanges Works
Most exchange operators use Bitcoin as an index to ascertain value, the USD price per Bitcoin to be more specific. All Cryptos are essentially weighed against Bitcoin and therefore with simple equations the worth of a given coin can be determined (In reality, this process is more involved and also contains the top coins like Ethereum and Ripple to provide a more balanced view on an index comparison).
The exchange pairs opposite traders and brokers the exchange. Coin A holder gets coin B, and Coin B
holder obtains coin A as fair value.
Simple Crypto Exchanges
Several online operators offer an instant exchange that require no registration or accounts. This requires little technical knowledge and functionally designs web pages guide the user through the process where they receive their desired coin in the destination wallet.
Trading platforms do require registration for higher value trades and accounts require legal verification including photo ID. Trades are executed within the trading platform from the trading platform wallets. Currency is only passed between wallets within the exchange.
Fiat Platform Exchange
A third type of platform exists which is somewhat of a halfway house. These platforms are more tailored towards longer term investments and allow for easy transfer of Fiat currencies in and out of the platform.
Typically, the range of coins which can be purchased and held tend to be the most stable coins.
Wallets exist on the platforms although options exist for you to download the private keys which provide the best of both worlds. If you have the private keys, you always have access to the value contained with the wallet address