The attention towards blockchain and cryptocurrency in general has become inevitable even to the average Joe. Everyone wants to talk about it, but very few know what is all about. In this column I will attempt to explain in the simplest terms, what is blockchain, what is cryptocurrency and what are their main characteristics.
First of all a few lines about terminology. If you have heard the words Bitcoin and Ethereum, you might have immediately associated them to a cryptocurrency, but it could have been in reference to the blockchain too. In fact both Bitcoin and Ethereum are both names for the blockchain technology as well as the cryptocurrency that runs on it.
There are also blockchains which do not run any proprietor token or cryptocurrency, such as Hyperledger for example. Hence, the association Bitcoin and Ethereum equals to Cryptocurrency, is technically speaking incorrect. Both are also a Blockchain.
Blockchain is the underpinning technology that facilitates the issuance and the circulation of a token. A blockchain is simply a distributed ledger, or a record of data, distributed over multiple nodes and validated in blocks. The block validation is the security feature that made everybody go crazy about blockchain.
Before this technology was invented in 2010, the main fear for an organisation was the classic hacker attack: Someone breaks into a set of data and makes use of it without authorisation. In blockchain the angle has changed completely.
The best analogy I can think of is the one of a burglar that breaks into someone’s house. Before blockchain existed, the thief could have literally done anything as the house was empty, the burglar could go totally unnoticed and there was no distributed inventory of the items in the house. With blockchain it is like as if the house is no longer empty, all the occupants know that the burglar is an intruder and all occupants keep an inventory of all items.
In simpler terms, an identity thief cannot enter in my house and pretend to be me. All my family member know who I am and will not believe that anyone else could be me. Blockchain does the same. A hacker can break in, but all the participants would immediately recognise the intruder and freeze the inventory to the latest block.
A block it is simply a way to determine whether the intruder is able to reconstruct memories or not. In the previous example, if a person looking exactly like me breaks into my house, my family members might ask a probing questions such as: “Where do you keep your motorbike keys?”. The intruder would need to know in which room, in which cabinet and which box contains my motorbike keys. These are like the blocks in the blockchain. If a hacker breaks into a blockchain cannot simply steal a set of data, because each set contains all the previous sets. So the hacked block will be immediately discarded.
To recap until this point, blockchain is a set of data, validated a block at the time, recorded in multiple places which are constantly synchronised.
In order to generate interest in people that voluntarily could invest time in validating blocks of data, blockchain creators reward the efforts offering a token of appreciation. Such token is the cryptocurrency.
The Bitcoin validation occurs through a code called SHA 256, a very very huge number made of 256 digits. An SHA 256 is generated in exchange of any data.
So if we type “hello” in an SHA 256 generator, we would receive a number that — because of encryption — is completely different than if we wrote “hallo”. There is no way to predict the response of such a huge number except for trial and error.
In Bitcoin specifically, its inventor Satoshi Nakamoto, decided that when an SHA 256 starts with multiple zeros, the validation of a block is successful. But how many zeros? Well, it is not a fixed number of zeros… as long as it takes 10 minutes for the most powerful processing power participating in the validation effort, the block is considered validated.
So if 2,000 computers are working simultaneously at validating a chain block using SHA 256, the system will define how many zeros is the SHA 256 supposed to begin with based on the fastest and most powerful computing power of the participants. So the participants will keep generating multiple response codes to generate SHA 256 codes starting with as many zero as possible, until the 10th minute is reached, and only at that point the token is awarded to the participant that has generated the highest number of zeros to begin with.
It sounds like a game to play with the children. Whoever blows the biggest soap bubble at the 10th minute wins a lollipop. But in fact the validation of blockchain has become a multi-billion dollars business, where China is playing a leading role.