What Is The Blockchain?

Blockchain (i.e. Blockchain Technology i.e. The Blockchain) is a computer network that works by being shared freely among and used by many participants.

The idea behind blockchain is that there are times when it is beneficial to have a permanent record of transactions. Those transactions can be the purchasing of property, the sale of goods or services, or the exchange of currencies. In its simplest form, a blockchain is just a list of transactions using a medium of exchange. In its initial implementation, that medium was a "coin" called a Bitcoin. Subsequently, many other coins were created and those coins are all used in their own blockchain. As of December 22, 2018, CoinMarketCap lists 2067 coins/tokens (https://coinmarketcap.com/all/views/all/). On the most basic level, they are all mediums of exchange for transactions that are put on a list. This list is called a ledger and this is intuitive as transactions are frequently economic.

When new transactions occur, they are added after old ones. To make this run smoothly and prevent fraud, each transaction and the order it was done in must be confirmed before it is allowed to be added to the list. This confirming is done by specialist participants who (for a reward) do the analysis, to the benefit of the entire network. These participants are called miners, for reasons we will get into a bit later. If confirming is made deliberately energetically challenging and time consuming, i.e. difficult, each time a new item is added to the list on top of old ones, it becomes harder to change older items on the list because you will first have to reconfirm all the newer items that came after it.

To visualize this, imagine you are a dog and you, like many dogs, bury things in the backyard. Say one day you bury a baseball. To do so, you have to remove some dirt, put the item in and bury it again. Every day, you put a new item in. You remove some dirt, down to the last item, and drop something new in, one after the other. Well, what if one day, you realize you want to get back something you buried 7 days ago. You miss your baseball. Well, that's unfortunate because you now have to dig down, and pull up everything you last buried. Digging down takes work. Lifting objects up takes work. It's a crude example but it conveys the idea: if an investment of someone's time and energy or computing power is needed to confirm a transaction, and you can't alter an old transaction without reconfirming everything that came after it, the labor necessary to fraud the system is unrealistic, except perhaps, for the most highly equipped and motivated adversaries. The structure of the blockchain, ideally, does a large part of the job of protecting itself from being damaged by a criminal.

If there are multiple miners and you also add rules requiring that there be a consensus among a certain percentage of them that said decisions are valid (for Bitcoin, the percentage is 51%), the job of tampering with the blockchain becomes harder still. This leads to the final basic necessity of a blockchain, which is to recruit a large number of people to simultaneously confirm transactions have taken place and to determine in what order they took place. A consensus above a certain percentage of total deciders will become the official decision of the network and the transactions that have been confirmed will be added to the blockchain.

To summarize, a blockchain is a distributed computer program running on many computers, each of which cooperate to either confirm that transactions were legitimate, or if their computers can't handle that much data processing, to at least maintain a current copy of the blockchain to assist other members of the network in maintaining their own records. Everyone needs an up-to-date copy of the blockchain.

There is more to it of course, but that's the rough outline.

One thing worth mentioning is that not all coins are meant to act as liquid financial instruments, be it currencies or speculative assets. Some are what are called tokens of utility. These are simply units used to quantify the number of transactions that occur between parties and are intended to remain relatively constant in value.

As mentioned earlier, in blockchains, verification of transaction accuracy is carried out by specialist nodes called mining nodes. The users who operate them are called miners. The important take away is that when miners are the first one to confirm a long list of transactions, which are called blocks and those blocks are accepted by a consensus of other miners and subsequently added to the blockchain, those miners who got there first will get a little bit of the coin that blockchain runs on. This has two effects: 1) miners are motivated to keep confirming transactions, and 2) this is an organic way for the network to introduce new coins to the total number of coins that already exist. In this way, on a regular and constant basis, there are more Bitcoins in circulation, for example, than there were before. The amount miners make for confirming a block will go down with time (it's controlled by an algorithm), and this relates to why they are called miners. It's a direct analogy to physical mining. As time goes on, there are fewer gold nuggets in the ground. They become more scarce and therefore more valuable. It's a way to deflate the value of the coins over time and prevent inflation, which would happen if the number of coins grew without limit.

Mining is done using a variety of computer chips. Once upon a time, a CPU could handle it. But as time when on, graphics processors i.e. GPUs, which are better at handling the math involved in confirming blocks took over. These were supplanted by specialized computer chips designed for exactly the purpose of mining and these are referred to as Application Specific Integrated Circuits (ASICs). For some coins, an ASIC is table stakes to even try to mine. Other coins are designed to be mineable with a personal computer.

Some coins can still be mined by individuals, but some are mined with such competitiveness, individual miners' only chance to be the first to confirm a block is to band together in what are called mining pools. These are teams of miners who share their computing power to work together to confirm transactions before other pools do. Your reward if the pool succeeds depends on how much processing power you contribute. In other words, your profit is proportional to how much you actually helped. Some examples of Bitcoin mining pools are: Slush, Bitcoin.com, Antpool, and BitFury (https://bitcoinchain.com/pools). China hosts the majority of Bitcoin pools. (https://www.buybitcoinworldwide.com/mining/pools/)


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