Understand the Blockchain, Ethereum and Bitcoin in 20 MinutesDecember 31, 2017
Bitcoin is known by everyone now, but do you understand how it works?
With Bitcoin, it is very possible to create digital-only nations, cryptocurrencies that are based on the universal basic income model, as well as performing international transactions without a 3rd party…but how does it really work behind the scenes?
All of that may sound out of your grasp but that’s what this article is for.
In this post, we’re going to cover:
- The history of Bitcoin and blockchain
- Why should you care about the blockchain?
- Cryptography in cryptocurrencies and the blockchain
- Cryptocurrency hashing
- Understanding the Bitcoin blockchain
- Understanding Ethereum
The first question to ask yourself is this; why was Bitcoin invented?
To answer that, we have to go almost a decade back to understand the purpose behind Bitcoin’s (and the blockchain technology) invention.
In 2007, the global economy faced a crisis in line with the bursting of the US house and property bubble. This event brought down the value of securities linked to the U.S. real estate significantly to critical levels.
One of the biggest contributors to this failure was easy access to subprime loans (loans given to individuals with poor credit scores or have difficulties repaying the loans) as well as the overvaluation of subprime mortgages.
All of these loans and financing options were given out like candy back then as there was a consensus that believed on the theory that housing prices in the US would continue to rise like a bull market.
Unfortunately, that was not meant to be. The economy crashed almost overnight and official findings by the Financial Crisis Inquiry Commission determined the entire financial crisis was caused by failures in financial planning as well as too much lending in the market.
The crisis was avoidable but greed and a lack of foresight from third parties ultimately burst the bubble of the US housing boom. The world believed that third parties such as banks and financial institutions had enough integrity and responsibility to handle the finances of billions.
As the financial crisis has proven, trusted third parties are not invulnerable. The crisis resulted in evictions across the country, foreclosures as well as bailouts by the government; the event is considered as the worst financial event since the Great Depression.
In response to this, Satoshi Nakamoto (a person or entity whose identity is unknown as of today) introduced a whitepaper called, “Bitcoin: A Peer-to-Peer Electronic Cash System.” The whitepaper believed that banks and institutions should not be completely relied on to process transactions.
Instead, he proposed Bitcoin, an electronic payment system based entirely on mathematical proof and cryptography techniques. The idea was simple; Satoshi wanted to produce a currency that is: independent of any central authority, transferable electronically, more or less instantly, with very low transaction fees.
This laid the foundation to the blockchain technology which is going to impact how data is transmitted in the future. In the next section, we’re going to explain the blockchain in-depth.
Understanding the blockchain technology is necessary if you want to understand what can be achieved with it, why it works, how to actually use it as well as knowing how it can affect future technologies in a positive way.
If you are skeptical about the idea of cryptocurrencies, this section will help you to understand why that is a view that has to change moving on.
This introduction will bring you through a number of concise but easy to follow introductory lessons that explain the fundamental principles and concepts that are required to understand blockchain technologies, of which Bitcoin is the most known and widespread application.
Bitcoin, the blockchain, and every other cryptocurrency are the result of three things:
- Cryptographic techniques
- Security protocols
- Trustless transactions
In a nutshell, cryptography is the science of encrypting (or codifying) messages so that only the sender and receiver can read the message. Even if the message is to be intercepted, it is written in such a way that only the sender and receiver can understand it.
At its core, cryptography has to solve a number of problems to make sending messages secure. One of the things that cryptography solves constantly is ensuring that a message will not be modified along the way.
It must also ensure that the sender’s identity is verified e.g the sender of the message must be the one who is actually sending the message, not anyone else.
These problems are the core ideas of the blockchain technology and what it is trying to achieve in the future.
Ever since the World War, symmetric (or private key) cryptographic techniques have been used to encrypt messages between two parties. The Enigma machine was a famous example of transferring messages cryptically for war purposes.
Let’s clarify this point with an example.
Alice and Bob want to communicate with each other about a private matter. To keep it confidential, they need to find a way to encrypt and decrypt messages so that no one else but them can understand the messages.
They can, for example, change every letter of the alphabet to numbers to encrypt their messages. They can also decide to use random, nonsensical words to replace normal words in their messages.
Another way to encrypt and decrypt messages is by using asymmetric or private key encryption (PKE). This is the most important part of the blockchain technology.
How PKE works is very easy to understand. In PKE, you have two keys: a public key and a private key. Data that is encrypted by one can only be decrypted by the other.
The easiest way to understand this concept is by using an analogy. Think of:
- Public keys as a normal lock
- Private keys as the keys to the lock
- The message or data that is being sent or received as boxes
For example, when you want to send a message securely, you encrypt it which is the same as locking a box with a normal lock. Everyone can see this box but they cannot modify or access the box because they do not the keys to the lock (your private key).
Public keys are actually the “send to” addresses in Bitcoin, so when you send someone money, you’re really sending it to their public key.
The encryption process can work in either direction which depends on your needs. There are two purposes for encryption: authentication and confidentiality.
Authentication is the act of ensuring a message is really sent from the sender. If Alice wants to send a message, she will use authentication to let everyone know the message is really sent by her and not by anyone else.
In other words, think of authentication as a unique digital signature to let everyone know that the message is really sent by you.
Alice does this by encrypting her message with her private key, making ciphertext (encrypted text). Anyone who gets a copy can attempt to decrypt the message it with her public key, which is known to everyone.
If you get confused, the boxes and key analogy may help you. To authenticate the message, Alice is giving everyone a copy of her private key to unlock box in order to read the message.
If the message is able to be decrypted back into plain text, then you can be assured that the message is really sent from Alice.
WikiLeaks founder, Julian Assange, uses this technique to ensure his readers that all of the content on the website is released by him.
If Bob wants to send a secret message to Alice, he will encrypt the message with Alice’s public key and send it to her. With the box analogy, Bob locks his message in a box with Alice’s lock.
Only Alice is able to open her own lock as she is the only one who has the keys to the lock. This is exactly the same as using her private key to decrypt the message.
If the message is able to be decrypted in plain text, Alice can read it and can be assured the message was intended for her to see. If the message cannot be decrypted, this means the message is not for her. This is the same as not being able to unlock a lock because you don’t have the right keys for it.
This ensures that only the person who the sender intends to send the message to is able to read the message. The same thing applies to transactions in the blockchain; money sent by someone can only be accepted by the person who is supposed to receive it.
When you need both authentication and confidentiality, it get’s a little complicated so you might have to focus a bit more on this section.
Consider this situation.
Alice want to send a message to Bob. However, Alice wants to ensure that Bob is the only person who can read and understand the message. At the same time, Bob also wants to make sure that Alice is the one who sends the message.
For this to happen, Alice has to encrypt or lock the message twice, once with her private key and one more time with Bob’s public key. When Bob gets the message, he has to decrypt it twice, once with his private key and once with Alice’s public key.
Why does Alice have to encrypt it twice and why does she have to do it once with Bob’s public key?
It’s helpful to not think of locks too strictly as if its real life. In the blockchain world, anyone can lock their data with someone else’s lock. This means Alice and everyone else has the ability to lock or encrypt their messages with Bob’s public key.
However, nobody can unlock or decrypt the message except Bob as he is the only one who has access to his private key. Everyone can use Bob’s lock to lock their messages but Bob is the only one who has the keys to unlock the locks.
Remember the part about authentication that we talked about earlier?
Alice uses her private key to encrypt the message to put her own unique stamp on it. This way, Bob can use Alice’s public key to verify that Alice is the one who sent the message, not anybody else.
By encrypting the message with her private key, Alice guarantees that the content of the message is what she actually wrote. By doing this, the message that is sent to Bob cannot be modified along the way even if it is intercepted by someone.
If the message is able to be decrypted, Bob can be assured that Alice is the one who sent it because her public key decrypted it and it was intended only for him because his private key is also able to decrypt the message.
Another important concept in the blockchain world is hashing. A hash is a short description of compression of a piece of data.
A hash is created using a mathematical function and algorithm (also known as a hash function) that delivers an output based on the input.
It is also a one-way function; we can’t go backwards with it because we’re actually destroying or losing data in the process of creating the hash.
You’re taking a large number, doing some fancy math, and producing a smaller number. It’s impossible to go backwards, because that smaller number can correlate to several (many) larger ones, and it’s impossible to know which.
A very basic example of a hashing algorithm with a one-way function is this.
You have a hashing algorithm that counts the number of vowels in a word or phrase.
In the input, you type in the word blockchain. The output (result) of the hashing algorithm gives you 3, the number of vowels in the word blockchain.
Every time you run the algorithm on the word blockchain, you get the same output no matter what as there will always be 3 vowels in the word.
However, you cannot take the output “3” to get the word blockchain. For example, the words freedom, special, and piano all have 3 vowels in them but they are very different words.
This happens because you are taking a large data (the words) and compressing it into a smaller output which are numbers in this case. That same number can be related to many more data points which are not exclusive to the input.
How does hashing relate to cryptography and the blockchain?
When you store important data, like passwords, it’s not wise to store them in plain text. If someone hacks into your database, sensitive data stored in plain text is a recipe for disaster.
To avoid that, you use a hashing algorithm. The algorithm changes the password into random, gibberish phrases. You only store the gibberish, and when someone tries to login, you apply the hashing algorithm again to the input. If the hashes match, the user is able to login without you ever knowing his or her real password.
When your database is now compromised, they won’t have access to the real passwords. However, a hashing algorithm is not invulnerable. If you have a weak algorithm, hackers can easily reverse engineer their way to cracking the passwords.
Another case may happen when multiple people use the same password; the hashes will then look the same. This is the #1 reason why cryptocurrencies use extremely secure encryption protocols to verify transactions in the blockchain.
Cappasity token (CAPP) is a digital utility token created by Cappasity Inc., a California-based company founded in 2013 with vast experiences in the VR and AR industry.
Cappasity token was created to realize the potential of VR/AR to become a major element of commerce and business in the future–not just a gimmick for video games and 3D entertainment.
The token is designed to build a decentralized ecosystem for augmented reality (AR) and virtual reality (VR) communities while at the same time, empowering the ecosystem by facilitating the trading of 3D content across a marketplace.
The platform’s vision is mainly driven by the team’s beliefs that the AR/VR revolution will be caused mainly by content creation.
With that in mind, Cappasity is a trustless decentralized platform that leverages blockchain infrastructure to create, rent, and sell 3D content for the AR/VR community.
Unlike other projects in the same vertical Cappasity already has a working content sharing platform that gets roughly 1 million views a month, a staggering feat for a platform only in its infancy.
We recently sat down with Kosta Popov, the CEO of Cappasity to have a chat with him about the project as well as finding out his thoughts and insights.
Hi, Kosta. Thanks for joining us today. Can you tell us more about yourself and Cappasity token?
I have been working as a software company CEO for over ten years. I founded my first IT company in 2005 and it specialized in video game development. Since that time, I have produced software and game projects for PC, Sony PSP, Sony PlayStation 3, Microsoft Xbox 360, Apple iOS, Google Android, and Web/SaaS.
We set up Cappasity in 2013 to develop 3D digitizing software for fast and accessible 3D content production. Then we launched the Cappasity platform in January 2017. The platform allows users to easily create 3D images of their products and place them on their websites.
Currently, we are working on a new version of the Cappasity platform that is based on blockchain technology and allows for easy, quick and inexpensive production and exchange of high-quality 3D content. Our AR/VR Ecosystem for 3D content exchange is a global environment that is fueled with a new digital currency – Cappasity token (CAPP). All payment operations will be conducted in CAPP within the Ecosystem.
First off, why did you decide to use the blockchain in building Cappasity platform and marketplace? What can the blockchain do that other technologies cannot?
Blockchain technology is used to deal with several issues. The blockchain ensures decentralized and trustless copyright storage. When exchanging content, the Ecosystem participants are sure that their copyrights are protected and they will not be cheated. That’s why all content and its exchange details are immutably stored in the blockchain and cannot be altered retrospectively.
In addition to this, this technology allows for nearly free, instant, and transparent global financial transactions. When 3D content is being sold via the marketplace, it is sold at the seller’s price and the Ecosystem participants are charged close to no fees. Therefore, content will be distributed at minimal prices within the system. The content owner receives payments for each transaction very quickly and without failure. Thus, the blockchain-based financial transactions are instant, transparent, and reliable and can be provided all over the globe.
Tell us about how you came up with the idea of Cappasity token. Did you face a problem within the AR/VR industry or do you think there is a gap in the market for Cappasity to fill?
The major obstacle that hampers development of the AR/VR industry is the lack of compelling 3D content. When we realized that the industry was facing a serious problem, we came up with the necessary solution. Our team decided to create a convenient environment for easy content production and exchange and provide the participants with all the necessary tools for fruitful interaction. Then we came to the conclusion that the system needed the payment equivalent. That’s how Cappasity token became a fundamental piece of the system.
What do you think is the biggest problem Cappasity will solve and why is the problem important to solve?
CAPP will be used to facilitate AR/VR/3D content exchange among the Ecosystem participants. When using CAPPs, creators and consumers of 3D content from different parts of the world will be able to easily find and buy anything they need.
Editors Pick: Birdchain ICO
Before we move on to Cappasity token, what are you actual thoughts on the VR and AR industry? You’re obviously optimistic about it why it’d be interesting to know why–why do you think AR/VR is going to be the next big thing?
Over the last five years 3D technologies have made a quantum leap in their development. AR/VR technologies started with computer games, however today they are in high demand in e-commerce, entertainment, art, medicine, education, the military-industrial complex, and some other industries. According to a study by the International Data Corporation (IDC), the worldwide AR/VR spending is expected to be $11.4 bn in 2017 and will jump as high as $215 bn by 2021. That means that the worldwide spending on augmented and virtual reality is expected to double every year until 2021.
AR/VR technologies have become an innovative and very effective marketing tool that provides strong emotional contact with the target audience.The public’s interest in these technologies is growing due to the unique opportunities of deep immersion into a created environment and interaction with any object. Everything points to AR/VR technologies further strengthening their positions over time. I strongly believe that VR/AR and 3D technologies will soon reach a new level in their development.
Tell me about the copyright management system of Cappasity.
Stolen content and piracy are a content creator’s worst nightmare. How will Cappasity token help to build a fair system for not only the content creator, but also the customer?
The Ecosystem is decentralized. Blockchain technology ensures decentralized and trustless copyright storage. All content and its exchange details are immutably stored in the blockchain.
Each content file is assigned with an ID or a hash to prevent any copyright infringement. All hashes of all the files are listed in the blockchain and cannot be changed. Once a content transaction is done, all its details will be processed according to a smart contract protocol and cannot be reversed retrospectively.
For instance, the system won’t allow a malefactor to sell someone else’s file by claiming it as their own, or rent a file for free when the rental period has already come to an end. Thus, blockchain technology fully prevents any copyright infringement.
With the AR/VR Innovation Fund and the Reward Fund, it’s fair to say that Cappasity token wants to give back to the community. Can you explain why is this important for the business as well as the industry?
As we take care of our community, we have decided to establish two endowment entities – the AR/VR Innovation Fund and the Reward Fund. These funds are aimed to favor the Ecosystem participants and stimulate the further development of the Ecosystem.
Active and talented 3D creators, content software developers, moderators, as well as active members of the community, will be provided with systematic incentives from these funds.
When we incentivize the most talented and active participants, we motivate them to release more high-quality content and applications and actively participate in the development of the Ecosystem. Highly motivated participants are one of the key success factors for both the business and the industry as a whole.
What has been your happiest moment so far working on Cappasity ICO? On the flipside, what has been the most painful, or perhaps the most regretful decision you’ve made with Cappasity token?
I enjoy working on the project and I put a lot of time and effort into it every day. I think that my happiest moment was when we started the crowdsale and realized that Cappasity token was in high demand. To be honest, I don’t remember any regretful decisions or negative moments while working on the project.
As for now, Phase 1 of the Cappasity token sale has just ended and we are preparing for the token distribution process. Phase 2 of the sale will start in March 2018.
Is the Cappasity platform already working with notable businesses or firms? Are there any future partnerships in process? If yes, can you explain briefly about it?
Cappasity is a company that has been successfully running its business for several years, and has earned the trust of many clients.
The latest version of our platform is already used by online retailers and we start working with museums and art galleries. The platform allows users to easily make 3D images of objects and embed them on their websites.
Since it takes up to three minutes to create a 3D image of an object, our clients can digitize as many products as they need daily. In addition, our software’s high and efficient throughput allows us to significantly decrease the cost of 3D digitizing. Thus, we provide scalability while maintaining high quality, which is exactly what businesses need.
Our business is constantly expanding. For instance, we have big plans to expand our platform in Asia within the next year on Alibaba Cloud.
Tell us more about the process of designing the Cappasity token to fit your platform. As a side question, what was the thought process behind having such a large token supply (7 billion)?
We’ve settled on creation of a native Ecosystem utility token (CAPP) since using our own cryptocurrency gives us independence, flexibility and the opportunity to determine our currency’s exchange rate and our economic strategy. In addition, digital currency is perfect for C2C (consumer to consumer) economic interactions. That’s exactly what we need.
Amount of tokens should be just comfortable for distribution and usage. Since Cappasity network will have millions of micro-transactions for content usage, we think it’s better to issue more tokens and operate with integer numbers.
What do you think is the biggest challenge or obstacle Cappasity token will face? How do you plan to tackle that challenge?
As the industry lacks high-quality content, I am sure that Cappasity token will be in high demand. There aren’t any serious obstacles that will hinder the Cappasity Ecosystem’s further growth or a significant increase of the Cappasity token value that we anticipate in the near future.
Moving on to more personal stuff, what does a typical day in your life look like?
There is always a lot of work to do. We update our development schedule to make it correspond to strategic business objectives every two days and cope with marketing and advertising tasks on a daily basis. Our team also regularly track their progress in working with clients using Pipedrive. I also have a lot of meetings and negotiations with our current and potential clients and investors.
Can you express one personal opinion of yours about the blockchain? It doesn’t matter if it’s negative or positive, we just want to hear your thoughts on it.
As you know, many experts compare the significance of the blockchain with the invention of the Internet. I personally believe that blockchain technology is very promising as it opens up unique opportunities for various areas of our life. I am confident that in the near future blockchain technology will revolutionize the world we live in.
Finally, what other personal goals (besides your career) do you have in life? Is there anything else in life you want to achieve?
I am keen on scuba diving and underwater photography. I would like to undergo specialized training to become a technical and cave diver.
That concludes our Interview with Kosta Popov
We’ll be scheduling even more exclusive interviews like this in the coming weeks to delve into the minds of what makes a blockchain startup tick as well asking the questions you want to know the most.
To make sure you don’t miss out on our exclusive interviews, go ahead and sign-up to our mailing list and subscribe to our social media channels.
Get in touch to let us know who you want us to interview as well as the questions you want us to ask.
You’ll get notifications on the latest exclusive articles as soon as they appear on our website – we won’t and will never spam you.
The blockchain is basically a public, digital ledger (or account book) where transactions are recorded. This record verifies transactions by verifying blocks of data in the digital ledger.
If Alice sends Bob $100, the bank would debit Alice’s account and credit Bob’s account. They would then update their ledger and we would have to trust the bank to verify our accounts correctly as well as their integrity in handling our hard-earned money.With Bitcoins, everyone in the network has a copy of the ledger as it is public and not owned by anyone. Therefore, there is no need for middle or intermediaries to verify transactions on the blockchain.
One of the properties of the blockchain is it is immutable. This means once a transaction is confirmed on the blockchain, it cannot be removed, modified, changed, or reversed.
AI is the go-to technology for today’s industry which inevitably benefits everyone and makes processes even more efficient and smarter.
The application of AI can be seen in practical problems in real life where extremely impressive results have been achieved especially in technologies that relate to vision, speech, machine translation, as well as decision making.
Even if you move out of the scope of research and development, AI is starting to gain a foothold in many businesses’ processes, with important processes such as database systems and user queries being powered by AI.
However, there are inherent problems within the industry that needs to be dealt with before it grows even bigger.
The learning process of AI and other machine learning models are hindered by an overload of data that are unlabeled and uncategorized.
These data can be classified but converting random dataset to a labeled dataset (a set of data with classes or tags to inform or educate the machine learning model) is very expensive and time-consuming.
Because of this problem as well as differences in businesses’ resources and processes, the gap between early AI adopters and individuals who adopt it much later will drastically widen, which grants early adopters an unfair advantage over others.
Neuromation is a platform designed for the AI ecosystem. The platform offers a much-needed solution to the industry which unites market resources, the scientific community, as well as other parties in an all-in-one, user-friendly marketplace.
The main focus of the Neuromation platform will be on synthetic datasets that have been proven time and time to yield compelling results for use cases.
The use synthetic datasets in machine learning and other processes will significantly decrease the cost of AI adoption as well as ease the process of mass adoption by the public.
So, what does the platform really do?
The platform will utilize a smart combination of datasets, decentralized computing power, as well as advanced machine learning models to help AI researchers across the globe connect with each other.
In layman’s terms, Neuromation aims to build the world’s most advanced AI data platform where businesses can access the platform and library of datasets to utilize and adopt AI technologies for their own use.
There will be an integrated exchange within the platform where users can either contribute or purchase the components of an AI model with one another; much like buying separate parts of a Lego set to build one complete project.
The Neuromation platform moves one step further ahead efficiency-wise by using distributed computing as well as proof of work tokens to help with the platform’s processes and transactions.
With offices in San Francisco, Tel-Aviv, Tallinn, Kiev and Moscow, Neuromation is led by Maxim Prasolov, a respected serial entrepreneur with tons of excellent projects and businesses under his belt.
Another important individual in the platform is Sergei Nikolenko, a respected CRO and scientist in the industry.
Sergei is a key individual in the machine learning department and contributes greatly to the platform’s technological growth while being the platform’s researcher in the field of machine learning and analysis of algorithms.
Neuromation also has two key advisors to the platform’s goals; they are David Orban, the founder of Network Society Ventures, and Andrew Rabinovich, the director of deep learning at Magic Leap.
Orban is responsible for the platform’s international integration into a deep learning community. Andrew, on the other hand, is the main man behind Neuromation’s object recognition technology, allowing the platform to achieve unprecedented results in algorithms training based on synthetic datasets.
Prasolov will lead a team of experienced developers and talented individuals to help power Neuromation, a platform set to revolutionize the AI industry.
Neuromation has been awarded the 1st Prize by the blockchain investors consortium at D10E
As mentioned earlier, Neuromation aims to combine the components needed to as well as synthetic data to build efficient deep learning solutions—all of this to be done on one platform.
Service providers registered on the platform can provide specific resources for the execution and development of the three key components: synthetic data sets, distributed computing services, as well as Neuromation’s machine learning models (which will be explained further down below).
Here is an excerpt taken from Neuromation’s whitepaper that describes how the platform will work:
“Imagine a place where you can go and easily address all requests to acquire AI capability. A vendor will create the data generator for you, then a group of Neuromation Nodes will use the generator to quickly create a massive virtual data set. You can then select a set of Deep Learning architectures to train on that data. Then another group of Neuromation Nodes will do the training in record time!”
Neuromation will consist of three core modules, each with its own processes and libraries.
Synthetic dataset module
Users have access to the synthetic data set module which can be utilized to create data generators, order data sets from the data generator, as well as requesting data labeling for models.
Libraries available in this dataset can be applied to deep learning models and data generators, as well as a library of datasets which can be acquired from the platform’s integrated marketplace.
Machine learning module
The machine learning module will include deep learning model processes, importing models to the platform, ordering training on selected data sets, as well as acquiring custom models from the marketplace.
Like the synthetic dataset module, this module will include deep learning models which can then be offered on Neuromation’s marketplace.
Users can purchase tokens in the user module as well as having access to the platform’s services and the ability to use or provide processing power to the network.
The user module will contain the user data and user models library.
The back-end of the Neuromation platform will also contain the Market Module which enables the efficient matching of buying and selling orders for datasets, models, and labeling services as well as enabling liquidity in the system.
NeuroTokens (NTK) (which will be sold during the token sale) are the primary exchange mechanism for synthetic data generation, distributed model training, data labeling and other AI services in the Neuromation platform.
Neuromation also applies a token burning policy which is the process of buying back tokens from the open market and removing it from the total supply to increase the inherent value of the tokens.
Here are the details of the upcoming NTK token sale:
Token name: NTK
Token base: Ethereum (ERC-20)
Token supply: 100,000,000
Token pre-sale duration: currently live till 1st of January 2018 (pre-sale duration extended)
Token sale duration: January 7th – 15th of February 2018
Token sale target: 60,000 ETH (hard cap)
Token exchange rate: 0.001 ETH = 1 NTK
” data-medium-file=”” data-large-file=”” src=”https://2dncjt2ndla62hl6yl24wc9a-wpengine.netdna-ssl.com/wp-content/uploads/2017/08/why-is-it-called-blockchain.jpg” alt=”The basic unit of the blockchain is a block of transaction data” width=”885″ height=”600″ class=”aligncenter size-full wp-image-3576″ scale=”0″ style=”box-sizing: border-box; -webkit-font-smoothing: subpixel-antialiased; border: 0px; vertical-align: middle; max-width: 100%; height: auto; clear: both; display: block; margin: 1.5em auto;”>
The basic unit of the blockchain is a block of transaction data. This data does not appear on its own, instead, each successive block that is added to the blockchain includes information of the previous block.
Each block has a reference to the previous block, and this is what places one block after another in time which leads to the term blockchain. Since data cannot be changed, you can track transactions all the way to the very first group of transactions ever made in a blockchain network.Think of the blockchain as pages on an accountant’s book. Each new page must include information from the previous pages to properly calculate the balances in an account book.
Hence, you cannot fake information unless you’ve changed data from previous pages in the accountant’s book.
The same principle applies to the blockchain; each upcoming block will be stacked on top of the previous block and it MUST contain references to the data of previous blocks.
On average, it takes about 10 minutes for a new block to be added to the blockchain. It might be quicker in some other cryptocurrencies but 10 minutes is the average rate in the Bitcoin blockchain.
Unlike normal transactions, you don’t literally send your money in an envelope, hand it to the bank (or a central authority) who then sends it over to your recipient.
Instead, each transaction on the blockchain is verified by solving mathematical puzzles with the help computers. People (or computers) who solve these puzzles and therefore verify transactions on the blockchain are called miners.
Like normal workers, miners receive incentives for verifying transactions as well as keeping the network safe and efficient. This incentive comes in the form of cryptocurrencies.
For instance, if a miner verifies transactions in the Bitcoin blockchain, it will receive bitcoins as a reward. For the Ethereum blockchain, the miner will receive Ether as a reward.
If a transaction is valid and the puzzle is able to be solved by the miner, the transaction will go through and be confirmed on the blockchain.
This is why cryptocurrencies and the blockchain are regarded as decentralised platforms that do not involve trusting a third-party with your funds or data.
When you receive information from strangers in the Bitcoin network, you can check for yourself that the block solutions are correct and are confirmed on the blockchain on websites like Blockchain.info.
Because the math problems involved in confirming a block on the blockchain are so hard, it is impossible for an attacker to fake a block or to verify fraudulent transactions on the blockchain.
Earlier on, we mentioned that a new block is added roughly every 10 minutes in a blockchain. However, you have to understand that it only takes 10 minutes when the network works together to solve the mathematical puzzle of a block.
If you were to use your laptop or computer to solve a block’s puzzle, it may take years for you to solve it even if you have an extremely high end setup.
Therefore, it is extremely unlikely for a hacker to attack the network as the hacker is not only facing the computing power of a single user, but rather the entire network.
By design, each block in the Bitcoin blockchain takes about 10 minutes to be verified. Usually, when you perform a transaction that involves Bitcoins, you might see a phrase that goes something like “6 confirmations needed”.
As you may have imagined, 6 confirmations is the number of times that a block has to be confirmed which works out to around 60 minutes or an hour for your transaction to go through.
Why 10 minutes per block?
The choice of 10 minutes was an arbitrary choice but the reasoning behind it is simple; short confirmation times could lead to stability while long confirmation times is too inefficient to work as a currency.
As more computers and miners join the network, the speed at which each block is added gets faster and faster each second.
To compensate for this improvement in speed, Bitcoin recalibrates the confirmation time by changing the difficulty of the math problems to ensure it’d take 10 minutes to solve it.
This number is not uniform with every cryptocurrency. Litecoin, for example, has an average confirmation time of 2-3 minutes. Ethereum can process transactions as quickly as 17 seconds; this does not mean that these coins are better than Bitcoin but instead it is just a matter of software design.
Let’s put it this way – Ethereum is exactly a platform like the Internet.
However, the Internet has one major weakness that Ethereum does not have.
What’s the problem?
The problem is this; everyone has a Facebook, binge watches YouTube, and checks Gmail almost daily. What happens if one of those website goes down because of a hack or a bug?
You cannot use it at all!
You cannot get on Facebook and connect with your friends, get back to those urgent e-mails, or watch your favourite videos until the website is fixed. When something goes wrong or shuts down, the whole thing shuts down – that is the underlying problem with centralised systems like the Internet.
Ethereum, Bitcoin, and cryptocurrencies that work based off the blockchain work like a network of computers. Instead of a single computer or network, the blockchain network is made up of computers from every single user of the blockchain.
If 10,000 people own Bitcoin, this means 10,000 users host the Bitcoin network – a stark contrast to the centralised standard of today’s websites and businesses.
Imagine Facebook running this way; when the main Facebook computer has a problem, many other computer on the networks are still working which means you can continue using Facebook.
The only way to shut down a blockchain network and cause a system failure is by literally shutting down every computer in the system. If there’s a million computers in a blockchain network, you have to take down 1 million computers to destroy it.
This system is reliable as a single point of failure is not going to disrupt the system. At the same time, since there are so many computers to take down, a hack or attack on the system is going to be very expensive on the attacker’s side.
You would probably be asking yourself, how can everyone’s computer run a website like Facebook or Google?
The answer to that is Ethereum is NOT a replacement to the current Internet infrastructure. Instead, it acts as a complement and arguably an upgrade to today’s Internet protocols.
Of course, there are some things that work better in a centralised system while others may be better off with a decentralised network.
Until Ethereum, the option to run a website in a decentralised way simply did not exist. With it, we now have smart contracts, the ability to track every single transaction in a network, and other improvements to outdated practices of the World Wide Web.
The easiest way to separate the two is by understanding the difference in their use cases.
Bitcoin is a form of digital money and it primarily acts as a store of value, like gold. Bitcoin has been around for nearly 10 years and is used to transfer money from one person to another like real money.
Again, it is only used as a store of value and as a way to perform transactions; Bitcoin is also critical to the public in understanding the concept of a decentralised digital currency like Ethereum and many more.
Ethereum is different in one core aspect.
Instead of only being a store of value, Ethereum can also transfer data the same way Bitcoin transfers money. This means the same blockchain technology used to verify, store, and confirm transactions can also be applied to the transmission of information.
Unlike Bitcoin, Ethereum is also programmable and able to be written in code which means anyone who is adept at programming can create their own blockchain applications like a decentralised housing market, a peer-to-peer cloud storage platform, or even a Bitcoin clone!
Many of today’s popular websites can be built on a decentralised system for greater efficiency; for instance, imagine an AirBnB-like marketplace that is built on a blockchain network that does not need a third (or multiple) parties to rent and book a house.
This opens up trustless communication where transactions, transfer of data, and significant decisions can be done without the need of a middleman or intermediary to work. This leads to lower costs and lower risks of scams in these kind of markets where trust is crucial.
Decentralisation is also important because it eliminates single points of failure in the case of an attack. This makes internal breakdowns and external attacks impractical as attackers would have to spend a lot of resources to take down multiple computers at once in the blockchain.
What are some uses cases of Ethereum?
With most websites, information is stored on a server. The server is, in a nutshell, just a computer with a database in it that has all of the site’s information from logins to transactions to user information.
If that database and its backups are damaged, the data is gone – forever.
With the blockchain, it is nearly impossible to take down as data is stored in every single computer on the network. Think of it as a database distributed among a large number of people’s computers instead of being stored in one big computer.
Since the blockchain is public, information stored in the database is accessible to the public and the data in the database cannot be removed, edited, or reversed due to the blockchain’s immutable properties.
Another thing that makes Ethereum special instead of just using the blockchain as a digital ledger (like most cryptocurrencies) is the existence of smart contracts.
Smart contracts work exactly how they sound; it is a digital contract that automatically executes terms in it when certain conditions are met. This means you don’t need an intermediary or institution to enforce the terms of a contract.
Smart contracts are written in code which makes it very easy to modify and execute for basically any situation that needs a legally binding contract to function.
An example of a situation where smart contracts can be applied is for an employee’s pay. In the smart contract, you specify which employee will be paid at the end of the month as well as bonuses to be paid when out when certain KPIS are met.
At the end of the month, the employee’s salary will be automatically paid without the need of the HR department or manager to do it. The smart contract will execute its terms (that is written in code) by paying the employee’s salary and determining if the KPIs are met or not for the bonus.
It is called smart contracts because it is actually code that represents an agreement like a contract. Unlike traditional contracts, the terms in a smart contract are enforced and executed in a smart way.
Here’s another example of a smart contract in action.
Imagine sending money from one account to another but only when a certain set of conditions are met. For example, let’s assume that you want to buy a house in Canada.
Traditionally, there are multiple third parties such as agents and lawyers who are involved in the trade. Funds are also usually put in escrow which makes the purchase of a home even more expensive when these fees add up.
With smart contracts, a piece of code could, in practice, automatically transfer the ownership of a house to the buyer as well as releasing the funds to the seller after a deal is agreed upon.
All of this happens without the need of an agent or a lawyer to make sure everything is paid for, it is done by code and enforced automatically depending on the conditions that were set in the contract.