Blockchain, Bitcoin, Mining And Cryptocurrency
Blockchain is a system of recording information in a way that makes it difficult or impossible to hack, change or cheat the system.Bitcoin is a decentralized digital currency that operates without the need of financial system authorities. It utilizes peer-to-peer transfers on a digital network that records all cryptocurrency transactions.
BlockChain is a technology using Bitcoin and all other crypto. Most closed, it is a financial book where it is infinitely reliably recorded who has as much money and who gave the money in the past.
Now we will write that information in the first block in the chain:
We will write that information in the next block, and we will connect it to the previous block:
We write both of these transactions in two new blocks, and each one is connected to the previous one:
Now we can see that the chain of all transactions has been created. Each of these transactions is one block. All these transactions together form the blockchain, a chain list of all transactions that have ever occurred within a single currency. Bitcoin, like every cryptocurrency has its own blockchain. It's actually one big file that records all the transactions between people ever.
No one can ever delete or modify any of these transactions again
This is the main reason why blockchain has become an important topic.
All personal data about the property can be recorded in it. In the future, such a chain will record who owns which house, lot, car, insurance, and so on.
This chain is infinitely secure for the following reasons:
First, the secret is in these links that connect the two transactions in the picture. They are used precisely to prevent the data from ever being changed once it is written, and that has to do with mining.
Second reason why transactions cannot be changed lies in the answer to the question of where this blockchain file actually resides. This is exactly the basic principle of blockchain technology:
Decentralization
In an ordinary bank, in one of their central registers, it is written who has how much money in the account and what the transactions were. It was written on some disk in some computer and that disk must have been backed up in several places, in several bank buildings, just in case.
In the blockchain, this central registry does not exist. Instead, some of the people in this world have voluntarily decided to participate, and the complete blockchain file is sitting on their computer.
These are called nodes.
Each of them keeps a fresh copy of this transaction register file on their disk. Every time a new transaction happens, it is instantly updated with each of these users, nodes. There is no "central authority".
Miners
Any node can apply to be a "miner", let's say they are Noah and Emma.
Olivia wants to send Ben $100 and initiates the transaction by having Olivia's computer send an announcement to all the miners in the network:
"Olivia wants to send Ben $100".
All miners' computers have now received information about the intention to execute this transaction. They first check if Olivia has enough funds by having the computer go through the entire blockchain chain, see all the transactions Olivia has ever had and calculate if she has that much money available.
So, in this world, there is no such thing as my "account balance", but it is always calculated anew, based on all the transactions Olivia have ever had. This is great, because it makes the blockchain extra secure. In order for someone to forcefully change your "available balance" they would have to change practically all transactions from the past, which is absolutely impossible.
So the miners have checked, Olivia has funds available, and that's the first step, which doesn't require any special computer. What comes after that is the problem.
At that moment, the competition starts: which "miner" will be the first to manage to incorporate this transaction into the blockchain and add it as the next block in the chain.
In order to enter a new transaction and add a new link in the chain, it is necessary to find a number. It is the number that "fits" into the link of the chain. Let's zoom in on the last two blocks in the chain: verified and new.
The old and new transaction now together form a single structure, a cryptographic code, and that code is just one bit away from being valid. That part is a number and is called a "nonce". Only when that number is found, a new transaction can be approved and "assembled" into a chain.
There is no way to calculate this number. The only way to find this number is for the computer to guess in turn, generate random numbers and try to see if they match.
It is necessary to try many numbers before finding the right one. So the only way to find this number is to have thousands of computers all over the world work on it at the same time - until someone guesses it.
On average, it takes about ten minutes. There is so much waiting for a bitcoin transaction today, just because of this.
The first miner in the world who guesses this number immediately sends a message to all other miners: "I found the number, it reads so and so". At that moment, all other miners stop tracing, because they can use that number to add a new transaction to their copy of the blockchain. In this way, the registry is always synchronized and the same for everyone.
The first miner in the world who succeeds in validating the transaction is rewarded - in crypto money. Gets bitcoins. So this is something like a lottery. That's why people buy expensive computers - they increase their chance to be the first in the world to validate the transaction, and thus earn more money. The more computers you have, the greater the chance, and therefore the earnings.
Of course, these powerful computers consume a huge amount of electricity, so the miner has to pay a solid electricity bill with his earnings.
The miner gets money from two sources.
First, the sender pays. On the 150 euros that Olivia sends to Ben, Olivia will pay another dollar or two (in bitcoins) as a reward for the miner who guessed the number first and thus enabled the transaction to happen at all. So, it is something similar to a commission for sending money in a bank, only that there is no bank here, but your commission is received by a lucky winner, one of the miners.
The second part of the reward for the miner is a certain amount of bitcoins that is automatically generated out of nothing, the moment the miner discovers the number. It's a reward for helping with the transaction.
The bitcoin system itself has been designed from day one so that new bitcoins are created exclusively in this way - by mining. All bitcoins in circulation actually originated like this.
The creator of Bitcoin, the Japanese Satoshi Nakamoto, set all the rules of the algorithm and started the system in January 2009. Then he created the first block in the chain. Everything after that was mined. In the beginning, only he mined, so today Satoshi has about 5 billion dollars in bitcoins. By the way, no one knows who Satoshi is, he never revealed his identity. But that is irrelevant - the system itself is designed so that Satoshi is not the "owner" of the currency and cannot possibly influence anything today.
Now it is clear why it is called "mining" - the miners actually dig and search for "gold".
New bitcoins are created by mining.
First, Satoshi designed the system so that this reward for miners is always known in advance, and it is halved every 4 years.
Second, he initially limited the algorithm so that the total number of bitcoins that could be created was 21 million. About 80% of this projected sum of bitcoins, about 17 million, have been generated to date. The more bitcoins, the smaller and smaller the reward, thus further preventing inflation. When miners have created 21 million bitcoins, this reward will be zero, and miners will only earn from transactions.
And the third, most important thing that prevents inflation is the very popularity of bitcoin. Its value is increasing, because 5 years ago you couldn't even buy Coca-Cola for 20 bitcoins, and today you can do a lot of things.
Why is the data in the blockchain immutable?
Let's say two years ago, Olivia sent Ben $150. That data is in an ancient block in the blockchain. And now someone wants to change that, to write that he sent him $100.
The thing is that the number that the miners found to make a transaction in the chain fits only if it reads like this: "Olivia -> Ben $150". If anything in the content of a transaction changes, it can no longer be part of the chain. Computers around the world, holding their own copy of the blockchain, would reject something like this smoothly.
Hundreds of thousands of people around the world are "miners", and they will forever benefit from what they do. In return, the entire bitcoin system gets infinite security, because their huge number guarantees that the information will be protected forever. That is the power of decentralization.
So, it is impossible to change the information in the blockchain, ever.
The data in the blockchain is public.
Blockchain is publicly available, on various sites. Every person in the world can see the contents of the entire blockchain at any time, all the transactions that have ever happened.
User 581247893225 sends user 457771475623 $200
User 211414562389 sends user 444865288452 $100
People are actually hiding behind these numbers, which are called addresses. The public can only see that a number sent money to another number.
It's the same with email addresses. If my email address is spiderman@gmail.com, you can know absolutely nothing about me.
Each user has his own long number called a private key. When you enter the system for the first time, you get that key, which only you know. You can write it down on a piece of paper, for example, or keep it on a USB drive. If anyone ever finds out your key, they can steal all your money, simply by transferring it to themselves. If you lose that key, all your money is gone, no one can access it anymore. So that is the most important thing.
When you want to send or receive money, your computer generates another number called an address, based on your private key. Likewise, the recipient's computer generates another address based on its private key.
Your address and the recipient's address are then sent to the miners for verification, plus of course the amount being sent. We have just explained that whole process in detail above. Once the process is complete, these addresses are written into the blockchain.
The public can see addresses, but no one can use your address to find out your private key, and of course, they have no way of knowing who you are.
So, to send money you need to know the address of the recipient and your address. This is then published and sent for "mining".
Some people sometimes put their bitcoin address publicly, say on their site to accept donations. In that case, logically, everyone knows your identity and can see how much money you got. It's written in the blockchain.
Digital wallet and cryptocurrency trading
The option of keeping the private key on a piece of paper or USB doesn't seem very reliable.
There are specialized sites, i.e. applications that serve just that. The most famous in the world is CoinBase as well as Exodus.
These applications generate addresses that are used to send and receive Bitcoin and other cryptocurrencies.
In addition to such solutions, there are also hardware wallets. It is a device that plugs into a computer via USB. It contains your private key, which is used to generate public addresses for transactions.
Despite all the advantages of such solutions, it is still desirable to have paper backups of your keys that you can keep in a safe place.
Cryptocurrencies allow anyone to become a trader. There is no need to register with a brokerage house, pay expensive fees, qualify for trader status or any of that in cryptocurrency trading.
It is enough to open an account on one of the trading platforms such as Binance, the world's largest cryptocurrency trading platform, where you can try it out with minimal stakes.
