What is blockchain technology?
Digital information (block) stored in a public database (chain).
I tackle the impossible and explain it. Pay attention.
Blockchain is most simply defined as a decentralized, distributed ledger technology that records the provenance of a digital asset.
When you want to trade or buy something, you visit an online or physical shop, store, or branch to purchase the goods or services you want. Digital marketplaces such as E-bay and Amazon, or you can also think about internet banking, provide an excellent platform. You know these channels, are familiar with them, and trust them. You would never think about not receiving your order or being a scam victim on these platforms. You also know they have a Customer Support Team where you can seek assistance if something goes wrong. And so you trust.
The same can be done on the blockchain without an intermediary, and you don’t even necessarily have to know with whom you trade. But it is much faster and more secure.
Okay, so imagine millions of computers (nodes) that all have the same history of transactions. Basically, they all have a copy of the same blockchain. Every transaction gets validated by everyone, and this bunch of data becomes the next part of the list, sort of continually updating itself. You can always add new data, but the already existing is immutable.
In other words, whenever we have a transaction and let’s say I buy something from you, this information gets logged. It gets verified by the computers, and then if all this information is verified and it all matches, the transaction goes through without intermediaries. It gets stored in a block, and when we make further transactions, this information is ready and embedded in the ledger. You can add new information but cannot alter or delete anything. New blocks are always added to the end of blockchain. So the reason it is called blockchain, chain of blocks.
As you can see, the actors are not just you and me, humans anymore, but machines interacting with each other directly (peer-to-peer).
Blockchain is completely transparent and secure. It uses cryptography, which helps encode all of the transactions and so you cannot see what exactly happened, but you can be sure that has happened.
A public blockchain is decentralized in a way that, instead of owned by a company or the government, it’s owned by everybody.
The above is a very simplified interpretation. There are many other applications of blockchain technology, such as voting, healthcare, education, etc.
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So now, let’s have a closer look at Bitcoin. But before doing so, first, we need to understand what money is.
What is money?
The currency started developing 6000 to 9000 years ago as a sort of medium of exchange. People used something of value. Societies worldwide started to select gold and silver as their primary currency about 3000 years ago, and around 680 BC, they became money when they were embedded in coins with equal weights.
Governments started creating representative currencies where you deposit your gold or silver. Banks had gold and silver in the treasury, and they came out with the notes. So money was supposed to be as good as gold because you can always convert them into gold.
Throughout history, precious metals were chosen as money, not through government decree but because of there unique features. Gold is rare, easily recognizable, portable, endurable, and visible. Above all, it is difficult to find and labor-intensive to mine, refine and mint it has always been perceived as a store of value.
In 1944 a new financial system was drafted, which would stabilize the world’s financial system once the war ended. The US Dollar was chosen to be the world’s reserve currency because back then, it was as good as gold.
The Us Dollar was backed by gold at a fixed price, $35/ounce. This created a system where the world’s currencies were effectively backed by gold for the US Dollar.
In 1971 President Nixon announced (The Nixon Shock) that foreign countries would no longer be able to convert their US Dollar holdings into gold. And with this decision, our current monetary system was created, where no currency is backed by gold or anything of value. This currency is called fiat currency.
So our fiat currency is backed by nothing but government promises and circulating by force.
Governments around the world have been able to issue unlimited amounts of new currency without restraint. Money, with the digital age, is becoming just a digit in the bank’s database.
What Bitcoin really is?
Many people think that Blockchain is Bitcoin.
Bitcoin uses the blockchain.
Blockchain is the underlying technology for Bitcoin, and it was developed specifically for Bitcoin.
Bitcoin is both a payment system and a virtual currency.
It is an open-source internet protocol that enables the transmission of value over a communication channel. You can think about sending an email or any amount of money to anyone over the world. It can’t be confiscated, frozen, or stop. The only way to stop a Bitcoin transaction is to shut the Internet.
Bitcoin differs from fiat currency in several things, but not in the things most people would think of first.
The first and foremost difference is that Bitcoin cannot be created out of thin air, such as fiat currencies.
The only regulatory tool for the creation of bitcoin is mathematics and cryptography.
The Bitcoin blockchain is not a centralized database where a control body – in this case, the Central Banks – keeps track of data traffic, balances, and transactions. Instead, it is an entirely decentralized network, a system of connected computers (nodes) that communicate directly (peer-to-peer).
All Bitcoin transactions are cryptographically verified by thousands of computers in the Bitcoin network. These powerful computers, known as miners, expend a massive amount of energy and processing power to verify each transaction’s integrity.
The decentralized nature of the Bitcoin network eliminates a single point of failure and makes it impossible to hack or to shut down. Bitcoin transactions are transmitted peer-to-peer without a third party, meaning that the users are in complete control of their money.
It is just a drop of knowledge as I would not want you to run away with your head full of information. We will take it slowly, step-by-step.
Please let me know if you have any questions; otherwise, you will soon hear from me.