A Beginners Guide to What is Blockchain & What Is Cryptocurrency
Blockchain has well and truly entered the collective lexicon in 2018.
It’s everywhere – blogs, vlogs, Facebook and Youtube – even mom has been talking about it!
But if you don't know what Cryptocurrency or Blockchain is you're not alone!
This article will help you understand why people are falling head over heels in love with Blockchain.
Discover why Cryptocurrency may be the biggest invention since the internet!
Blockchain is so big, people are hyping it up into something that can change the world – and it’s allegedly making some people very rich!
But what is Blockchain exactly?
What is Blockchain's connection with cryptocurrency and what is its ultimate purpose?
These are just some of the questions we’ll be covering in our introductory beginners' guide to blockchain technology.
But first …
What Is a Blockchain?
Blockchain sounds really complex – and it is and it isn’t.
In simple terms, a blockchain consists of series of blocks that record and store information permanently using cryptographic coding to link the blocks together into a chain.
Generally, people associate this store of information with Bitcoin and the recording of digital transaction data on the Blockchain.
Most people think Blockchains only store financial information such as the Bitcoin Blockchain which records all the payment information / Bitcoin transactions between Bitcoin owners.
However, theoretically, Blockchains could store anything from voting records to medical data.
When a block is rubber stamped (i.e. approved by the computer network as a legitimate transaction to join the Blockchain), the new block is added to the chain – hence, the term blockchain.
So what is a Blockchain?
In essence, a Blockchain is a secure transaction (public or private) ledger database – a digital record – that can only be shared by individuals who are part of an established network of computers.
This makes Blockchain super safe, transparent and because it is administered all by computers Blockchain is free from human error or deception.
As you can imagine this is why there is so much hype!
Gone are the days when we have bankers or governments who can manipulate the money supply or rob us blind without our knowledge.
What Blockchain Can Do?
Blockchain has become synonymous with Bitcoin – but Blockchains can do a lot more than be simply used for recording digital currency transactions.
Blockchains databases could be used to store any kind of data, from details of financial transfers to tracking ownership of digital assets in an open and transparent way through recording the transactions on a public ledger.
Blockchains are perfect for storing records and digital information
For example, take a look at Everledger, an Australian company that uses blockchain to record information about the ownership and provenance of various valuables, including diamonds.
In this use-case, blockchain is being used to record who owns what.
This means it can reduce theft and fraud and promote certainty.
What else can blockchain be used for?
➤ You can use blockchain to transfer money
➤ You can use blockchain to raise money
➤ You can use blockchain to make micropayments
➤ You can use blockchain to share electricity with your neighbours
➤ You can use blockchain to prove your identity
➤ You can use blockchain to issue shares
It’s important to keep things in check, however, not everything needs blockchain.
If a problem you need to solve requires immutability, consensus or trust, you might want to use blockchain.
If not, you may not require Blockchain.
Blockchain Smart Contracts Explained
One of the best things about the blockchain is that in order for a new block to be approved to join the network a consensus of the network's computers must be achieved and that's it!
There is no need to pay or wait for intermediaries (Middlemen).
Blockchain saves you time, conflict and avoidance of deceit or human error.
Now to Smart Contracts.
In 1994, Nick Szabo, a legal scholar, and cryptographer, realized that the decentralized ledger (i.e. blockchain) could be used for smart contracts, otherwise called self-executing contracts, blockchain contracts, or digital contracts.
Essentially what Nick did was convert written legal agreements or contracts to computer code which could be stored on the Blockchain.
When the conditions of the contract were met the contract would be automatically executed by the computer.
What are Smart Contracts?
Smart contracts can help you exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman.
Suppose you purchase a car from me and we live on opposites sides of the country.
You can execute this transaction without worry through the blockchain by paying in cryptocurrency.
Upon making payment for the car you'd get a receipt which would be recorded/held in our virtual smart contract.
This transaction would then be recorded on the public blockchain for everyone to see.
The terms of the contract would say the funds are held in escrow on the blockchain until either you confirm receipt of the car at which the point the funds are released to the seller; or
After a specified timeframe per the contract, we agree that the contract has judged to have fallen through at which point the funds are returned to you the buyer.
I then have the confidence to send you the car as I know the money has been locked away in escrow and you have the confidence to know you will get your money back if you don't get the car by a specified date.
Smart contracts can be used for all sorts of business situations and transform the way we do business, interact both from an efficiency, trust as well as a cost perspective.
Why Blockchain Is Important
Blockchain has been compared to the Internet in the sense that no one really knows yet how it will evolve but people know the potential is huge!
But what we do know is that, if blockchain is allowed to develop free from regulations (much like the internet was), we will all be able to reap the benefits.
For example, blockchain technology can create tamper-proof, resilient distributed records.
This means – among many other things – that it can help trace donations from a donor to make sure that they find their correct path to their intended recipient.
Blockchain is also essential to the future of banking and finance because it helps to develop trust – or regain trust – in what has become a trustless world (or at least sector).
And that’s the key – blockchain provides trust, transparency, and efficiency.
How Blockchain Transactions Work
To illustrate as simply as possible how blockchain transactions work, I’m going to use the example of a Bitcoin transaction.
Let’s imagine that you own some Bitcoin and want to send me some.
You publish your intention (i.e. make a payment) and wait for the computers (often called nodes) to scan the Bitcoin network.
Each computer on the network stores a full copy of the ledger so they have a complete history of what transactions have occurred.
This scan of the blockchain primarily validates two things:
1) That you own the Bitcoin that you’re intending to send to me; and
2) That you haven’t previously sent this Bitcoin to someone else
When this info is verified, your transaction is allowed to go ahead.
This transaction is then bundled along with other transactions into a block.
The block then gets attached to a previous block and the block is now stored on the blockchain forever.
Once a transaction has been made, it can’t be reversed or tampered with.
What’s the Difference Between Blockchain and Cryptocurrency?
If you’ve heard of blockchain, you’ve heard of cryptocurrency.
And if you are new to this space I can guarantee you that you're not the only one who has thought:
“What is the difference between Bitcoin and Blockchain?” or
“What is the difference between Blockchain and Cryptocurrency?”
After all many people have thought they are the same thing.
For the last few years, these two have gone hand in hand and people have used the terms interchangeably.
As a result, a degree of confusion has arisen – is blockchain the same as cryptocurrency and can one work without the other?
You can think of the difference between cryptocurrency and blockchain as similar to the email and the internet.
Blockchain is like the Internet a technology and cryptocurrency like an email or a use or application of the internet.
The key difference between the two is that blockchain is a technology while cryptocurrency i.e. Bitcoin is a use of the Blockchain technology to facilitate certain outcomes.
In the case of Bitcoin, this is to transfer value in an open and transparent manner with each transaction being recorded on the Blockchain.
In a nutshell, a Blockchain is a method for recording information in an open and transparent manner.
In the case of Bitcoin, this was used to transfer wealth digital money hence the term “digital currencies”.
However, as more and more blockchain companies arise soon we will start seeing more applications of non-currency based blockchain uses.
For example, De Beers Diamonds are creating a Diamond blockchain to track the movement of diamonds from the mine to the end user so you can have confidence that you are in fact getting a diamond.
Other uses include global motor vehicle title registries so that you can do a scan of the global blockchain to see if the person who is selling you your car is the legal owner and not a stolen vehicle.
It wouldn't surprise me if soon we start having global credit histories recorded on global blockchains or distributed ledgers so banks and financial institutions start having a global view of your credit history, borrowing and lending habits.
As you can see blockchain is the technology that underpins cryptocurrency or “crypto” and which makes the likes of Bitcoin possible.
This means that blockchain can work without crypto – but crypto can’t work without blockchain.
It is important to note that it is entirely up to a blockchain's creator as to how they allow the blockchain information to be accessed.
For example, a company like De Beers could, in fact, create a private blockchain that is only open to miners, diamond cutters, diamond polishers, and Jewellers.
This blockchain could then record all movements in the Diamond from the ground in Africa right through to the Jeweller in London.
De Beers could then provide customers search access to their blockchain to verify the authenticity of the Diamond as well as update the network as to the change in ownership.
This could be done by allowing customers to purchase a “De Beers Coin”.
The coin would be required to update the blockchain.
You'd need to pay a transaction fee of x De Beers Coins in order to get the network to process the change and update the Blockchain.
Or alternatively, De Beers could simply use the Blockchain as a free database to improve trust and transparency amongst buyers.
But What About Blockchain Wallets?
A big question people have about blockchain and cryptocurrencies relates to security.
How do we know our coins will be safe?
To purchase, hold, trade and keep your cryptocurrencies safe, you need a digital wallet.
A blockchain wallet allows you to manage digital coins – For example Ether and Bitcoin.
You can create a Blockchain Wallet for free, and everything is done online.
You just need an email address and password to verify your account.
Once your wallet is up and running, you’re given a Wallet ID, and to access your wallet you’ll need to log into the Blockchain website.
You can use your wallet to exchange Ether for Bitcoin and vice-versa, and you’ll be shown a quote that tells you how much you should receive according to the current exchange rate.
A coin exchange won’t appear immediately because it takes a while (usually a few seconds to a few minutes) for a transaction to be recorded onto the blockchain.
Cryptocurrency Hardware Wallets
Hardware wallets are probably the most secure way to store your coin private keys.
You can think of a private key as being like the PIN number for your bank account.
Private keys are the cryptographic code that allows you to connect to the blockchain and interact /make transactions on the blockchain.
Only you should have access to your private key.
Never divulge this to anyone.
A common mistake that people make is that they think their coins are stored in your cryptocurrency wallet.
This is in fact incorrect.
It is your Private keys that are stored in your wallet.
And the safest way to protect your private keys is in a hardware wallet that does not connect to the internet.
Offline wallets are extremely hard to be hacked because they are not connected to the internet.
As a result, if you're serious about protecting your crypto then you must have an offline or “cold storage” hardware wallet,
Ledger Nano is the first most popular cold storage or offline hardware wallet that we recommend.
The Ledger Nano is aimed at Bitcoin and alternate coin investors who want maximum security and peace of mind.
Thanks to a second security layer, Ledger Nano is able to thwart attack vectors.
You can purchase the Ledger Nano wallet by clicking this link.
Trezor is the other most popular alternative and is ideal for anyone who needs a place to store a lot of Bitcoins.
Trezor is a popular bullet-proof wallet that protects your private keys from malware, phishing and hackers.
Allowing you to keep your coins save.
Trezor is also easy to use, open source and ideal for beginners.
A hardware Bitcoin wallet, Trezor is ideal for anyone who needs a place to store a lot of Bitcoins.
Trezor is bullet-proof against malware and your private keys will never be exposed.
Trezor is also easy to use, open source and ideal for beginners. However, it does, however, cost $99 and is a little bit more on the pricier side.
Got any questions? Comment below and we’ll get right back to you.
If you’ve found this article useful feel free to tip me Ethereum by sending Ether to my Etherum address: 0xc6000420dfa6076b3e7602476fc61169b6c561ce
This article does not constitute financial advice and all investors should invest in cryptocurrency at their own risk and get independent legal and financial advice should they feel it necessary.