What is Blockchain? Blockchain Technology Explained Simply

What is Blockchain

technology

? Is it “the next big thing”? Are you missing out on a once-in-a-lifetime opportunity when some startup wants you to invest in their

blockchain

-based company? Well, stick around, in this episode of Crypto Whiteboard Tuesday we will answer these questions and more. Hi, I'm Nate Martin from 99Bitcoins.com and welcome to Crypto Whiteboard Tuesday, where we take complex cryptocurrency topics, break them down, and translate them into plain English. Before you start, don't forget to subscribe to the channel and click the bell to receive an immediate notification when a new video comes out. Today's topic is Blockchain and the exciting world of

blockchain

technology

.

Hopefully, by the end of this video you will understand exactly

what

blockchain technology is and why it is so difficult to separate it from Bitcoin. Before understanding how Blockchain technology works, we need to understand

what

problems it was designed to solve, so let's take a step back and let me ask you a question... How do we know if something is fake or real in today's world? For example, a dollar bill, a driver's license, or a vote in an election. How do we determine if it is valid or not? The answer? We keep a record of it.

For example, each dollar bill has a serial number registered by the bank. The DMV records your driver's license number and voting records are used to track who voted and who didn't, so the same person won't be able to vote twice. Whenever you want to verify that a document is legitimate,

simply

check with the appropriate authority. We even have notaries, people authorized by the government to act as witnesses to attest and record the validity of information or identities. You will notice that there is one thing that all of these mechanisms have in common: they are all centralized, meaning that there is a central authority, whether it is a bank, a state office, or a person who has the power to issue and validate information.

These central authorities have a lot of power and, as you know, power can sometimes corrupt. So what happens if one of these authorities wants to change the facts or even change history a little? This may seem far-fetched, but even our world history is just a record maintained by historians centrally. The phrase “History is written by the victors” tells us that sometimes facts can be distorted by those in power. If you don't think that's possible, here's a real-life example. Today, most money is just a record of who owes what to whom. Due to the subprime mortgage crisis in 2008, almost a thousand companies in the US received more than 630 billion dollars that had never existed before.

Other companies had their debts completely eliminated. Some would say this bailout was justified, but there is no denying that someone decided to change the records of how much money was owned and owed. That's why Bitcoin was born. It was the first form of money to eliminate the need for a central authority. Their records are kept by everyone, not just central banks. And when everyone keeps track and fact-checks, well, that means you can no longer change the transaction ledger when something doesn't add up or because it's more convenient. In fact, you have to start being responsible. But money isn't the only place where decentralization can play a role.

Remember those big encyclopedias we used to rely on when it came to research? The Encyclopedia Britannica employed one hundred full-time editors and more than 4,000 contributors to publish what we considered the authority on knowledge. Imagine the power the editors of these books had to decide what was worth mentioning, condemning, tolerating, or ignoring. Well, the last volume of the Encyclopedia Britannica was published in 2010. Today, information is much more decentralized with more than 130 thousand active editors maintaining different Wikipedia pages. The risk of any of them “going unnoticed” is much lower since each edition is public and anyone can verify it.

Decentralization reduces the risk of corruption, fraud and manipulation. Blockchain technology is a new and innovative way to implement decentralization. Simply put, Blockchain technology is a solution to the problem of centralization. It's a system for everyone to keep records, without the need for a central authority: a decentralized way of maintaining a ledger that is virtually impossible to falsify. I mean, when there are so many eyes watching and checking everything you do, it's very difficult to break the rules without anyone noticing. You may be wondering why it is called Blockchain? Well, let's imagine that we maintain a shared ledger with many pages of records.

Each page begins with a sort of summary of the previous page. If you change a part of the previous page, you will also have to change the summary on the current page. So the pages are actually linked or chained. In technological terms, pages are called blocks. And since each block is linked to the data of the previous block, we have a chain of blocks, or blockchain. Many people think that Satoshi Nakamoto, the mysterious inventor of Bitcoin, created Blockchain technology. Technically, he single-handedly created the first real-life implementation: Bitcoin. In fact, that word blockchain is not even mentioned in Satoshi's original white paper.

The closest you get to saying Blockchain is "chain of blocks." Now that you know what blockchain technology is, we still have two important questions to answer: how does it actually work? Will Blockchain change our future? Let's start with the first question. Another way to ask this question would be: how do I create a system that allows everyone to create, verify and update records? Well, there are four elements that a blockchain needs to have a life of its own. The first thing needed to support a blockchain is a peer-to-peer network: a network of computers, also known as nodes, that have the same privileges.

It is open to anyone and everyone. This is basically what we already have today with the Internet. We need this network to be able to communicate and share with each other remotely. The second ingredient is cryptography. Cryptography is the art of secure communication in a hostile environment. It allows me to verify messages and prove the authenticity of my own messages, even when malicious players are nearby. We need cryptography for the first element. Remember, I said anyone can participate in this network, including bad actors. It's great to be able to communicate, but I also need to make sure my communication is unchanged.

The third element is a consensus algorithm. You can change the technical word "algorithm" to the word "rule." This means that we must agree on the rules for how we add a new page, also known as a block, to our records. There are many types of consensus rules, in the case of Bitcoin we use a consensus algorithm known as Proof of Work. This algorithm states that in order for someone to earn the right to add a new page to our ledger, they must find a solution to a mathematical problem, the resolution of which requires computational power. The computers on the network run calculations to solve the math problem, and in doing so they consume a lot of power.

In other words, they do a lot of work. That's why when one of them finds the number that solves the problem and shows it on the network, they are basically showing "proof of work." Think of it as the node's way of saying, "Hey, I spent quite a bit of energy here solving this problem first, so I have the right to write the next page." As I mentioned before, there are other consensus algorithms that don't require as much energy, this is just the type of algorithm that the Bitcoin blockchain employs. There are pros and cons to different algorithms, but to run a decentralized ledger you will need to choose one;

Otherwise, it will be very difficult to reach a consensus with so many people on the network. Finally, our last element is punishment and reward. This element is actually derived from game theory and ensures that it is in people's best interests to always follow the rules. So far, we have created a network that has a way to communicate securely and follows a set of rules to reach consensus. Now we will tie these elements together by giving a reward to people who help us maintain our records and add new pages. This reward is a token, or coin, that is awarded each time a consensus is reached and a new block is added to our chain.

On the other hand, bad actors who try to cheat or manipulate the system will end up losing the money they spent on computing power or may have their coins taken away from them. In the end, the important thing to remember is that the punishment and reward system acts on psychological behavior. Turn the rules of the system from something you must follow into something you will want to follow because it will be in your best interest to do so. This was just a very high level explanation of what a blockchain is. If you want to delve a little deeper into this process, check out our Bitcoin mining video, part of our 7-day Bitcoin crash course.

There you have it, the four elements to creating blockchain technology: a peer-to-peer network, cryptography, a consensus algorithm, and punishment and reward. However, there is a fifth element that can't really be synthesized: market adoption. I mean, we can have a group of five people sharing a ledger with a consensus algorithm, but that doesn't actually make it decentralized, since there aren't enough people who are part of the system. Furthermore, if there is no adoption, our currency really has no value and the fourth element of punishment and reward is not very effective. Only once a critical mass in the number of users is reached does a blockchain become truly decentralized and therefore immutable.

And at that point, the currency of that blockchain usually begins to appreciate in value. It's hard to say what triggers mass market adoption. In the case of Bitcoin, things actually started through use on the dark web, where people used Bitcoin to pay for drugs and other illegal things. But since then, more people have started researching Bitcoin and blockchain, and seeing the benefits they offer; either in practice or as an investment. There you have it, the five elements of a truly open, public and decentralized blockchain. As of today, there are only a handful of blockchains that have more than 1,000 truly independent participants and, as such, can be considered decentralized: Bitcoin, Ethereum, and Monero, to name a few.

If you're thinking that starting a blockchain seems like a lot of hard work, you're absolutely right. But this is where Ethereum comes into play. Ethereum is a Do It Yourself blockchain where these five elements are already in motion. All you need to do is build the appropriate solution on top of it. But that's a completely different slate episode that you'll get to see later. Now let's move on to another term you may have heard: private or closed blockchain. This term refers to companies that select and limit the players that can participate in their blockchain. It's a bit like the difference between the Internet, which is open to everyone, and an Intranet, an internal network of company computers.

While I suppose some companies will find value in running private blockchains to improve their internal processes, it is far from exciting since it has nothing to do with decentralization. To emphasize this a little more, let's compare public and open blockchains with private and closed ones. A public blockchain is open to everyone, transnational, and borderless. It is censorship-resistant and does not require third-party involvement. It is also neutral: there is no “good”, “bad”, “illegal” or “legal” transaction, there is only a “valid” or “invalid” one. On the other hand, a private blockchain is limited only to authorized participants and is governed by a handful of entities.

In the words of Andreas Antonopoulos, in most cases of private blockchains you don't really need a blockchain, you can

simply

share a spreadsheet between participants. The whole idea of ​​blockchain was to decentralize a process across the general public, and that is the exact opposite of what a private blockchain does. The features of a public blockchain, on the other hand, generate enormous benefits. There is no single point of failure. Records are immutable, also known as tamper-proof. And finally, it is censorship-resistant, so a record cannot be deleted or prevented from being published, as long as it follows consensus rules.

Before we finish today's lesson, we still have one important question to answer: Is blockchain technology the next big thing? I guess you may have heard of different startups using blockchain technology to solve some kind of problem. In most cases, when I hear about such a company, I do twoQuestions: First, do you use a public or private blockchain? Because if they're not using a public blockchain, there's really nothing very disruptive here. Secondly, do they even need a blockchain? If you remember, at the beginning of this lesson we talked about the dangers of centralization. But these dangers are only significant if the stakes are high.

For example, the queue to go to the pharmacy is managed centrally, but I don't care because there is not much at stake and it is also more efficient that way. Blockchain technology is very good at decentralizing, but it is also very inefficient, slow and consumes energy. For example, the Bitcoin network takes on average 10 minutes to confirm a transaction. Not the ideal wait time to buy a cup of coffee at a 7-11. The only reason to choose Blockchain technology as a solution is if your problem is actually centralization. If you don't need to decentralize something, you probably don't need to use blockchain technology and will be better off with some centralized solution.

In fact, it will probably work better. In short, Blockchain technology is truly disruptive, but at the moment there are only a handful of use cases that really require it. So the real question is this: at the current moment, is our world ready for a more complex blockchain implementation than what Bitcoin already offers? In the early 2000s, there were many Amazons, Googles, and Facebooks that never realized the changes they presented... Today, many of these blockchain startups face the same fate. That's it for today's episode of Crypto Whiteboard Tuesday. Hopefully by now you understand what Blockchain technology is: an open, censorship-resistant method of managing records for everyone, making them virtually impossible to falsify.

It is a solution to the problems presented by centralization. I also hope that whenever you hear the term "blockchain technology" in the future you know to take it with a grain of salt and ask the right questions. You may still have some questions. If so, please leave them in the comments section below. And if you're watching this video on YouTube and enjoy what you've seen, don't forget to hit the like button. Then, be sure to subscribe to the channel and click the bell to get notified as soon as we post new episodes. Thank you for joining me here on the board.

For 99bitcoins.com, I'm Nate Martin and I'll see you... in a moment.