Crypto-Currency Simplified
Hi all,
Thanks again for visiting my blog.
As they say, good things come to those who wait. (Well, technically you guys weren't waiting for this, but good things are coming for you nonetheless :P). This blog is all about crypto-currency (that expensive Bitcoin, that relatively cheaper Ethereum etc.) [yes, the "hype" around crypto-currency got me] and more importantly, the underlying infrastructure (BlockChain) that supports it.
With my limited understanding of all this, let me explain it to you guys by answering some simple questions. Also, I have tried to keep the implementation specific details away and this post is only meant to give you guys an intuition of how this stuff works.
- What really is a Block Chain?
Put simply, a block chain is just a chain of blocks where each block is a list of transactions. If I were to 'jargonize™' it, a BlockChain is a decentralized ledger (records/account book) of transactions which are recorded in a permanent fashion and are verifiable. Let's explore what it means.
'Decentralized' in this context implies there is no central authority (like a bank) maintaining the ledger.
Permanent here means that once something is written to the BlockChain, it will stay there until the end of time (or at-least until the computers having copies of it aren't dead).
Verifiable here implies that if a transaction (this may also be some other type of data) is to be put in a BlockChain, you can verify whether it's legit by just looking at the other transactions in the past that it links to (which are already present in the BlockChain).
There are a lot of "super"-computers maintaining a copy of this BlockChain, solving challenges and submitting a block to it. Let's talk a bit about what the last statement meant. When someone wants to make a transaction, they broadcast it by including the public address of the recipient and sign it. The miners listen for transactions, put the transaction in a block (since a block is just a fancy list of transactions) (if they want to) and then solve a math challenge. If they are able to successfully solve the math challenge (which takes a lot of compute hours - this is the main reason why mining bitcoins is expensive), they publish the block and other miners decide whether to include it in their copy BlockChain. Now that this list of Blocks is maintained by all the miners, a new Block, when published by someone, will be verified against this history of Blocks to see if it contains legitimate transactions. If most miners do not find this block to be valid, they won't include it in their copy of the BlockChain and hence the transactions inside that Block won't get approved.
Theoretically, this is why the BlockChain network requires > 50% nodes to be good and to work ethically. The fancy term for this is Distributed Consensus.
So I basically mean, there is something out there, to which Bob can "tell" that he wants to pay some amount to Alice, and it will verify that Bob has that amount in the first place, and if he does, it will deliver that amount to Alice and store it in a permanent record so that Bob cannot re-spend that amount. And that something is not a centralized authority or a single source of truth, but is distributed all across the world.
I hope you guys feel like:
- What is Crypto-Currency?
Now that we think we understand BlockChains, let's try and understand what a CryptoCurrency is. It's certainly not a quick way to make money. It is a form of digital currency which is built on BlockChains. CryptoCurrency is traded against physical currency (dollars etc.) and can be purchased by paying in dollars. Also, the total amount of a particular CryptoCurrency is constant (Eg: the total amount of Bitcoin that there ever will be in existence is 21 million).
The amount of CryptoCurrency someone owns is tracked by the BlockChain network rather than a centralized authority like a bank. Also, you can pay anyone who has an address on the BlockChain network with probably lesser transaction fees (which are charged by miners and are an incentive for them to stay good).
- The 2 sides of "bit"coin?
- One of the major advantages of CryptoCurrency is that anyone can make a transaction at any time from any corner of the world. With physical currency, this becomes tricky on bank holidays. The "address" of the sender or the recipient is not linked with their personal information. The address is merely a cryptographic public key. So people can remain anonymous while making transactions.
- On the flip side, CryptoCurrency is currently highly volatile (and one of the reasons of this is the upper limit on the number of coins of a particular CryptoCurrency there can be. The other reason is probably the hype around it.). Along with that, one of the main challenge here is a lack of understanding of how it all works (Well, you don't have to worry about that at least :P). It's also like taking a leap of faith when we expect more than half of the compute power to be working ethically. Also, it takes good amount of energy, and hence money, to cool this infrastructure down since a lot of heat is generated by performing a compute intensive task.
- How do people make money from this?
- That's a difficult one. An easier question would have been how do people lose money from this. One of the most popular ways in which people make/lose money with CryptoCurrency is by trading it against physical currency on online exchanges like CoinBase. Again, the high volatility makes this process very risky.
- A less popular way to make money from this is by mining CryptoCurrency or being part of a Mining Pool (a way for people to share their compute power and divide the rewards). The hardware to mine this is quite expensive, and even GPU's fall apart when it comes to mining CryptoCurrency. (remember the math challenge that these computers need to solve? It all boils down to that :P). The state of the art way of mining CryptoCurrency is using Application Specific Integrated Circuits (ASIC's).
- Where can I go from here (and possibly correct some information presented in this blog :P)?
While there is a lot of confusion about BlockChains and CryptoCurrency, this is one particularly excellent resource that I found online to learn more about this stuff: Bitcoin and Cryptocurrency Technologies.
Please feel free to leave any feedback, point out any mistakes or suggest any topics you would have me write about. See you next time!!
PS: Please be like --
Thanks again for visiting my blog.
As they say, good things come to those who wait. (Well, technically you guys weren't waiting for this, but good things are coming for you nonetheless :P). This blog is all about crypto-currency (that expensive Bitcoin, that relatively cheaper Ethereum etc.) [yes, the "hype" around crypto-currency got me] and more importantly, the underlying infrastructure (BlockChain) that supports it.
With my limited understanding of all this, let me explain it to you guys by answering some simple questions. Also, I have tried to keep the implementation specific details away and this post is only meant to give you guys an intuition of how this stuff works.
- What really is a Block Chain?
Put simply, a block chain is just a chain of blocks where each block is a list of transactions. If I were to 'jargonize™' it, a BlockChain is a decentralized ledger (records/account book) of transactions which are recorded in a permanent fashion and are verifiable. Let's explore what it means.
'Decentralized' in this context implies there is no central authority (like a bank) maintaining the ledger.
Permanent here means that once something is written to the BlockChain, it will stay there until the end of time (or at-least until the computers having copies of it aren't dead).
Verifiable here implies that if a transaction (this may also be some other type of data) is to be put in a BlockChain, you can verify whether it's legit by just looking at the other transactions in the past that it links to (which are already present in the BlockChain).
There are a lot of "super"-computers maintaining a copy of this BlockChain, solving challenges and submitting a block to it. Let's talk a bit about what the last statement meant. When someone wants to make a transaction, they broadcast it by including the public address of the recipient and sign it. The miners listen for transactions, put the transaction in a block (since a block is just a fancy list of transactions) (if they want to) and then solve a math challenge. If they are able to successfully solve the math challenge (which takes a lot of compute hours - this is the main reason why mining bitcoins is expensive), they publish the block and other miners decide whether to include it in their copy BlockChain. Now that this list of Blocks is maintained by all the miners, a new Block, when published by someone, will be verified against this history of Blocks to see if it contains legitimate transactions. If most miners do not find this block to be valid, they won't include it in their copy of the BlockChain and hence the transactions inside that Block won't get approved.
Theoretically, this is why the BlockChain network requires > 50% nodes to be good and to work ethically. The fancy term for this is Distributed Consensus.
So I basically mean, there is something out there, to which Bob can "tell" that he wants to pay some amount to Alice, and it will verify that Bob has that amount in the first place, and if he does, it will deliver that amount to Alice and store it in a permanent record so that Bob cannot re-spend that amount. And that something is not a centralized authority or a single source of truth, but is distributed all across the world.
I hope you guys feel like:
- What is Crypto-Currency?
Now that we think we understand BlockChains, let's try and understand what a CryptoCurrency is. It's certainly not a quick way to make money. It is a form of digital currency which is built on BlockChains. CryptoCurrency is traded against physical currency (dollars etc.) and can be purchased by paying in dollars. Also, the total amount of a particular CryptoCurrency is constant (Eg: the total amount of Bitcoin that there ever will be in existence is 21 million).
The amount of CryptoCurrency someone owns is tracked by the BlockChain network rather than a centralized authority like a bank. Also, you can pay anyone who has an address on the BlockChain network with probably lesser transaction fees (which are charged by miners and are an incentive for them to stay good).
- The 2 sides of "bit"coin?
- One of the major advantages of CryptoCurrency is that anyone can make a transaction at any time from any corner of the world. With physical currency, this becomes tricky on bank holidays. The "address" of the sender or the recipient is not linked with their personal information. The address is merely a cryptographic public key. So people can remain anonymous while making transactions.
- On the flip side, CryptoCurrency is currently highly volatile (and one of the reasons of this is the upper limit on the number of coins of a particular CryptoCurrency there can be. The other reason is probably the hype around it.). Along with that, one of the main challenge here is a lack of understanding of how it all works (Well, you don't have to worry about that at least :P). It's also like taking a leap of faith when we expect more than half of the compute power to be working ethically. Also, it takes good amount of energy, and hence money, to cool this infrastructure down since a lot of heat is generated by performing a compute intensive task.
- How do people make money from this?
- That's a difficult one. An easier question would have been how do people lose money from this. One of the most popular ways in which people make/lose money with CryptoCurrency is by trading it against physical currency on online exchanges like CoinBase. Again, the high volatility makes this process very risky.
- A less popular way to make money from this is by mining CryptoCurrency or being part of a Mining Pool (a way for people to share their compute power and divide the rewards). The hardware to mine this is quite expensive, and even GPU's fall apart when it comes to mining CryptoCurrency. (remember the math challenge that these computers need to solve? It all boils down to that :P). The state of the art way of mining CryptoCurrency is using Application Specific Integrated Circuits (ASIC's).
- Where can I go from here (and possibly correct some information presented in this blog :P)?
While there is a lot of confusion about BlockChains and CryptoCurrency, this is one particularly excellent resource that I found online to learn more about this stuff: Bitcoin and Cryptocurrency Technologies.
Please feel free to leave any feedback, point out any mistakes or suggest any topics you would have me write about. See you next time!!
PS: Please be like --
Comments
Post a Comment