Understanding Blockchain – Blockchain for Dummies
What is Blockchain, if you are reading this, I salute you, blockchain technology is the future and you are doing yourself justice for wanting to learn about it. Hopefully, my article Blockchain for Dummies will help you get the understanding you need. Cryptocurrency is sweeping the world and everyone’s asking questions of what it means for them. Is Bitcoin the currency of the future? Should people invest in it? How exactly does it work and what are the reasons for people wanting to use it? There’s plenty of issues to address with Bitcoin and all other types of cryptocurrency (Ether, Litecoin, ripple and hundreds of others.) and there’s a lot to understand about how it works and what makes it different from your standard currency. Getting a handle on exactly what you are getting into is important for somebody looking to invest in this rapidly changing and dynamic market.
The paper money that we use in our day to day lives is known as fiat currency. It’s currency that has value because our government (Or in the case of the Euro, several governments.) says it has value. Cryptocurrency doesn’t have a bank backing it. It’s generated by a computer algorithm that dictates the supply of the currency and how it gets distributed. In both cases the currency is only worth something because people believe it is worth something.
One of the great benefits of cryptocurrency is that it can be exchanged between two people without them ever knowing who each other is. For buyers and sellers who prize anonymity cryptocurrency is a Godsend. It’s also a universal currency that allows people from different countries to make transactions without having to deal with middlemen for converting their currency via use of a middleman who will charge fees on the exchange. Having Bitcoin or other cryptocurrencies allows a person to purchase anything from anywhere in the world in a direct and anonymous way.
So how does Blockchain work
Exactly how all of this is done is through the power of blockchain. If you have no idea about what blockchain is then imagine this as a blockchain for dummies starter class. The blockchain is the distribution of a series of ledgers to computers all over the internet. It’s as if a bank outsourced all it’s book keeping to millions of people around the world. The blockchain draws up a contract between two people and then when the buyer adds their cryptocurrency to the sale that is added to the contract and sent to the seller and the blockchain confirms the sale has been completed and the funds have been transferred. The whole system verifies a sale between two parties and insures both sides got exactly what they negotiated for. Think of the hassle of buying a house. The seller has to hire agents to field bids and market the house and understand the legal issues of selling a house. The buyer has to go to a bank to either get funds or verify that they have the funds needed to make such a purchase. Lawyers have to draw up contracts between the two sides to make sure everything is being done in good faith. Notaries are brought in to verify the contracts were signed by the parties. Layers upon layers of middle men each getting their cut of the transaction before the sale even goes down.
With blockchain and cryptocurrency the middlemen are all skipped. Both sides in the transaction deal with each other directly (and anonymously if so desired) and once the deal is completed the contract (or smart contract as it is sometimes called.) is executed and both sides receive what they asked for. The purchase is logged on the blockchain and is recorded for anyone using the blockchain to see. This is the simple and direct way that transactions will be handled in the future. This is why so many people are hopeful about cryptocurrency and blockchain as being tools for a new generation of commerce.
Another big point in our blockchain for dummies course is that the blockchain is decentralized. The ledger that keeps all these transactions is stored on thousands and thousands of computers. This makes attempts to hack the ledger to try to edit or destroy it very difficult if not downright impossible. The computer power that would be needed to perform such an attack on the network would be enormous. It would also be self-defeating because attempting to perform such a hack to steal a cryptocurrency in this manner would show weakness in the security of that cryptocurrency and drastically lower its value. Between the huge amount of effort and the lack of reward it’s very unlikely any such attempt to disrupt blockchain will ever happen.
Now you might be thinking exactly why people have their computers working on making blockchains for these cryptocurrencies. Since we’re doing our best blockchain for dummies presentation here I’ll explain the incentive for working on these blockchains. Computers that help with the blockchain are solving difficult mathematical problems to build the blockchain. When a certain amount of transactions to the blockchain have been verified by the computers the algorithm that controls the currency will release currency to some of the computers that did the work. This lottery can be very profitable for those who win it. This process is known as “mining” in the cryptocurrency community and is another way of earning a cryptocurrency without having to purchase it directly with fiat currency. Mining generally requires a lot of processing power and people build systems exclusively to mine. Some will even go so far as to join others with similar set ups in a “mining pool” to distribute any cryptocurrency won in the lottery. Mining is a big subculture in the cryptocurrency community and you’ll find plenty of information about it on-line if you’re interested.
Hopefully this article was able to give you some insights into cryptocurrency and how it works and the nature of the blockchain and how it is a powerful tool that could lead to all sorts of innovations when it comes to how we handle transactions and conduct business. The internet revolutionized the way the world worked over two decades ago and blockchain stands ready to do it all over again. Now is the time to learn about this amazing new technology.
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