What Are You Talking About?
When I started to dive into the wilderness that is crypto and everything that surrounds it, I noticed a certain theme. There are lots of articles explaining what everything is and how it works, but they all use technical terms.
Most articles that I found assume you have a technological background and understand terms like decentralized, nodes, mining, hashing and much more.
The few who focus on other aspects seem to be aimed mainly at those who have a financial and economic background and knowledge of the stock market.
But what about the rest of us? Who have a vague interest in bitcoin and mainly how people seem to be making money with it, but where facebook and Gmail is about the extent of our technological knowledge?
That’s what this article is about. I’ll do my best to explain what I have learned in the last few weeks, and keep you up to date with what I continue to learn. The good, the bad, and the ugly. If you have any questions, do leave a comment and I’ll do my best to answer as clearly as I can.
Blockchain and Bitcoin
Blockchain and bitcoin are the two terms most talked about, and for the uninitiated it is easy to assume they are the same thing. They are not.
Blockchain is the type of technology and bitcoin is the first digital currency to run off that technology. You could see it as the internet and facebook. Blockchain is like the internet, and facebook is what runs on the internet. *
* Like everything in this article, this is an extremely simplified example and probably not entirely accurate. But it is good enough to start to understand what we are talking about here.
I’ll come back to bitcoin later on, but let's first explore blockchain. If you understand a little bit of technology and were around when the internet just started, this is a very good article to read: “How to Understand Blockchain if you are over 40” on the Forbes website.
I’ll try to explain blockchain with a little story.
Jane and Max are married for 3 years, when Suzy, Jane’s best friend, one day came to her and told her that Max was cheating on her. She saw him, hiding in the rain, kissing another woman.
Jane confronted Max who of course denied everything. Jane had to choose. Who would she believe? The man she married, or her best friend? Both could be telling the truth, and either could be lying.
In another scenario, Suzy tells Jane that Max has been cheating and she saw him at a party kissing another woman. There were 50 other people at that party. Jane does not know all of them, but via via she gets their numbers and asks them. Over half of them confirm that they indeed saw Max kissing another woman, and Jane knows the truth now, however devastating it might be.
How Does That Translate To Blockchain?
Blockchain is very similar to a group of people who all know the same thing at the same time. Any information that goes onto a blockchain is kept by lots and lots of computers, which are called nodes (there, your first blockchain term!).
Since each node knows the same thing, if 51% of the nodes says something is true, it is accepted as true, and the other nodes (computers) update their information.
Where Do The Cryptocurrency And Digital Money Come In?
None of this works if there are no computers who have that information. Having only one computer where you store that information means that a hacker or someone with bad intentions only has to corrupt that one computer. In other words, that’s the same as only Suzy knowing about the cheating and Max would only need to bribe Suzy not to say anything.
On the other hand, if everyone at the party knows it will be highly unlikely that Max can bribe them all, and that he can do that before Jane can give everyone a call to confirm.
The solution to the problem of needing computers to store that information is money.
Pay people for the option to use their computer. Crypto or Digital Money in this case. People who want to use a blockchain pay a small price for each transaction. That money goes in part to the company who offers the software (the organizer of the party), and in part to the people who lend their computers to the blockchain (the people at the party).
In our fictional scenario, Jane wants to know if what Suzy says is correct but she cannot go to the party. Luckily, Becky can go.
Jane offers Becky a cookie for every person she talks to at the party to confirm the story Suzy told her.
Becky, in this case, is a miner. She confirms information with the nodes (people at the party).
Homemade cookies are similar to bitcoin. It is payment for a service. The nodes (people at the party) volunteer their service to simply have the information and confirm or deny when asked. The miners (Becky) get paid for doing the service of confirming the information.
* I am aware that this is a very simplified analogy, since it involves much more, including calculations, and putting cookies in the next block. However, for a basic understanding, it works well enough.
Bitcoin is the first type of cryptocurrency, but it is not the only one anymore.
Other Types Of Cryptocurrency
Imagine now that Rose also has a husband she doesn’t really trust, but her husband never goes to parties. He goes to soccer matches. Rose cannot use the same blockchain as Jane because she needs a different service.
Rose asks Alex for help to go to the soccer match and talk to everyone there and confirm or deny her husband's affair. However, Rose is not very good at baking cookies, so instead, she pays him in homemade scarfs.
Becky hears about this and really doesn’t like cookies too much but also hates soccer matches. Alex loves soccer but also really likes cookies. So they agree to trade. Since a cookie is smaller than a scarf, they agree amongst each other that one scarf is worth 3 cookies.
Becky now has to go to 3 parties in order to get one scarf, and Alex only has to go to 1 soccer match to get three cookies.
In crypto terms that means that 1 scarf is worth 3 cookies, or in other words:
Scarf/Cookie exchange rate = 3
Cookie/Scarf exchange rate = 0.333
This is what happens when people talk about trading, buying and selling cryptocurrencies. There are different blockchains, different cryptocurrencies, and the value is determined by the people owning them. If nobody wants the cookies because they are stale and taste bad (in crypto: because the software behind the cryptocurrency is not working or it doesn’t have any value), they will be worth less, or even nothing.
Hashing; or, Doing The Work
Another term you hear a lot when you enter the mysterious world of crypto is Hashing and Hash rates. This simply refers to how much work a computer can do. Someone who can go to 2 parties and 3 soccer matches a day will earn more than someone who can only attend one party. The higher the hash rate, the more cryptocurrency people make.
“Real” Money Value
Continuing with our example; the scarfs that Rose makes are very beautiful and Alex decides to sell them for Dollars, Euros, or any other “regular” currency (in blockchain terms these types of currencies are called FIAT).
Now suddenly the scarfs are worth $10 USD. Meaning one cryptocurrency, a scarf, in this case, is worth $10 USD and someone who has 5 scarves has the equivalent of $50 USD in their closet.
This is similar to what is happening with bitcoin and other currencies. There are people who are not interested in mining (lending their computer to form part of the blockchain, or in our example going to a party or soccer match and talk to everyone to confirm the information) but they do want to have bitcoin (or scarfs or cookies) as an investment or just because it’s cool. They go to someone who has bitcoin and ask them to trade.
If there are more people who want to buy bitcoin than they are who want to sell, the price per bitcoin will go up.
If there are more people who want to sell bitcoin than there are who want to buy, the price will go down.
Of course there is much more to it, but breaking it down to its most basic, this is more or less what it is.
Real world examples
All that is of course very interesting, but how does it matter in real life? How will it help us and how will it transform and change the world as we know it?
The same questions were asked when the internet just started. Because it was so new, there was no way to predict where it would lead us and how it would change the world around us. And yet, within 10 years everything was different, and now we cannot imagine a world without the internet; without youtube, streaming, and facebook.
Something similar is happening at the moment with Blockchain. The world as we know it is changing and we don’t know yet where it is going, but there are quite a few real world examples that are very interesting.
Proof Of First Ownership
What if a musician writes a song, records it, and sends a demo tape to a famous producer. A few weeks later the artist hears the song on the radio, but performed by someone else. It is his word against the producer about who wrote the song first.
If the original artist would have had access to a blockchain software to make a notification that they wrote the song, which song, and who they send it to, they would have proof beyond a reasonable doubt that they wrote the song and the producer would have to pay up.
This would be similar to the original artist playing in a crowded stadium, and 50.000 people afterwards testifying that they heard the song there first.
Unalterable Records Of Where Money Goes
One of the major benefits of blockchain is that once you put something on it, it’s there forever. Any data on a blockchain cannot be changed, you can only add data to it.
In the case of giving to charity, if blockchain is used to record all received donations and all payments, everybody can see where the money went. If a person is dishonest and uses the money for their own benefit, they cannot go back later and change the records to show less money coming in.
The donors do not depend on the self-reporting of the charity nor do they rely on an external audit to make sure after the fact that the charity did with their money what they said it would do.
What Is Blockchain?
Blockchain is a system where a lot of computers store the same information, so that it is practically impossible to alter that information quick enough without people finding out.
What Is Bitcoin?
People who lend their computer to be part of the blockchain get paid for it in cryptocurrency. The most famous one is bitcoin, but there are a lot of others out there.
What Is FIAT?
This is the “regular” currency, such as USD, Euro, Pound, etc.
What Is Mining?
Mining is the act of lending your computer to be part of the blockchain to confirm or deny information and earning cryptocurrency in return. In order to do so miners need access to the blockchain, therefore miners are also nodes, however, nodes do not have to be miners.
What Is A Hashrate?
Hashrate is how fast your computer is in mining and therefore how much cryptocurrency you can make.
What Is A Node?
A node is a computer who has information contained in the block. Nodes are run by people on a volunteer base.
- If you find any incorrect information in this article, please reach out and let me know so that I can change it. I am always willing to learn and accept when I am wrong about something.
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