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In the spirit of the “______ for Dummies” books, I've decided to write something that I hope will help people unfamiliar with blockchain and cryptocurrency to learn about it with less technical or financial jargon. I've noticed that, for the most part, a lot of wikis and other information sites on these subjects, even Blockchain for Dummies, contain lots of conceptually complex ideas or vocabulary that can often hinder people from really understanding this new technology. And given the recent massive Twitter hack, and the subsequent fallacious blame some are attributing to Bitcoin and cryptocurrency in general, I think it would be good to define some things so as to help everyone understand what this new technology is all about.

I've initially tried something similar in a previous series of posts I wrote called Exploring Blockchain (Part 1 | Part 2 | Part 3). There, I discuss how blockchain is related to different technologies, and where I believe it's going. However, today, I want to get right down to the basic concepts behind blockchain, define the main ideas in 'laymen's terms', and hopefully give a firm, but easy to grasp, foundation for someone who is new to the whole space. Keep in mind, I am also still learning daily about this space!

With that, let's start with the main definitions.

Blockchain and Cryptocurrency

For newcomers, these terms might seem synonymous. However, while related, they are different in the same way the 'Internet' and 'websites' are different. Blockchain describes the underpinning technology, while Cryptocurrency is a digital asset that is often built using blockchain technology. Let's define them in an easy to understand way.

Blockchain

A blockchain is basically a list of information agreed upon by a network of peers, in which the previous items (or blocks) on the list inform what can be added afterwards. In order to add something onto the list, I have to not only have all the data from the previous blocks, but I need to get everyone in the network to agree that the new item I am adding is legitimate.

Because of this, a blockchain is extremely secure. It is already difficult to fool one part of a network into changing its list. But even after making a change in one list, when attempting to match up with the rest of the network, you fail, because everyone else would be able to say, “No, that's not the right list,” and reject you from the network. In order to do make such a change, you would have to get a majority of the network (and sometimes more) to agree with your list. But, as the network grows with more and more peers, especially if those peers are not in one easily accessible location, it becomes exponentially more difficult to hack into and change information on the blockchain.

The secure and data-centric nature of blockchain leads it to be an easy fit for the financial world, where the integrity of transactions depends on how easy it is to modify a list of those transactions. For example, in the traditional case, I can buy a coffee with my debit card. But let's say I am able to hack into my bank records afterwards and simply erase the transaction. So now, the money that was supposedly used for the coffee is back in my bank account. This is a double-spend, in which I can now illegally use one instance of money on multiple things.

Such a scenario is theoretically impossible to do on a blockchain. Even if I were to be able to hack into a bank account and erase the transaction, if that bank is part of a blockchain network, if it tries to go back in, it will be rejected. The bank will have to change its list back so it can once again operate within the blockchain network.

Bitcoin is the first product created that used blockchain. In fact, it would be basically true to say that the invention of Bitcoin was also the invention of blockchain. But Bitcoin is also a cryptocurrency. So let's define that.

Cryptocurrency

A cryptocurrency (often shortened as crypto) is a digital asset (or token) that can be used in a digital network. While they don't necessarily have to be, the vast majority of cryptos today are built on blockchain because of its secure nature. Since transactions cannot be tampered with easily, it is natural to rely on a blockchain to legitimize all transactions. If I am accused of not sending the money, I can always refer to the part in the list where it says I did send it, and every block on the list afterwards will also agree.

But cryptocurrencies can be used in other ways as well. In terms of base use-case, crypto tokens on a blockchain network can simply be used to legitimize agreement. For example, if a blockchain is created for the purpose of voting, then the person who has the right crypto token in that network can send it to a “yes” or “no” box for a proposal. Again, since that transaction cannot be changed, we have a legitimate way to identify a vote with cryptocurrency without worrying about fraud or double-spend. These examples, as well as a variety of other potential use-cases, have spawned a whole new chapter in technological development, as well as the beginnings of entirely new economies.

So why is this important? Why is there a need to develop and build upon this new technology? Does it offer any advantages that our current systems don't have? To answer this, let's dig into the philosophy behind blockchain and cryptocurrencies.

Decentralization

If you go around forums and websites that discuss blockchain and cryptocurrency, it's almost inevitable that you'll begin to hear the word decentralization, discussions on decentralization, whether a particular coin is really decentralized, and a number of other related concepts. Related is the discussion of the nature of blockchain being trust-less (i.e. the idea that you don't need an intermediary to make a transaction happen).

This is mainly because Bitcoin (the first cryptocurrency) was borne out of the ashes of the 2008 Great Recession. As per claim of its white paper, the idea was to wrest control of money away from central banks and financial institutions which (in the creator's mind) had caused the crisis, and put the power of money back into the hands of individual people. It was a very libertarian idea, and one that, for the majority of developers in the space, drives the ethos behind different blockchain and crypto projects.

But, if you were to take the power away from these traditional institutions, how would you put it back in the hands of people without creating another entity that would probably and inevitably end up just as authoritarian and corrupt as the ones you took it away from? In other words, how do you take power and authority that was once centralized into a few entities, and be able to put it in the hands of multiple participating entities, each of which would not be required for the whole system to function?

This is the primary idea behind decentralization, in which the power and authority to govern and make changes in a system doesn't rely on a single person or entity. Notably, decentralization isn't unique to the blockchain space. In politics, it's popularly thought of as democracy (though there's dispute about this), and in economics it's known as free-market capitalism.

A blockchain, in many ways is already decentralized. This is, perhaps, the genius behind Bitcoin. While its white paper refers to a man named “Satoshi Nakamoto”, this man doesn't actually exist. He, she, or they (if it was a group of people that created it) are essentially anonymous. It's one of the cooler and stranger mysteries behind this whole space, and the fact that no one in this day and age has yet been able to truly identify Satoshi Nakamoto is a testament to this person's (or group of people's) commitment to the philosophy of decentralization.

Because blockchain offers such a strong proof-of-concept for decentralization, many people in the space have come to believe in an almost idealistic, technocratic vision that blockchain can truly bring about the libertarian ideals it was founded on. Whether this technology eventually bears that fruit, a lot of progress has been made towards this front. There are now currency exchanges that run on blockchain for the purpose of not needing to rely on a single company. There are 'smart contract' systems that don't require legal companies or developers to lock agreements into place. It has even given rise to decentralized apps, or DApps.

Crucially, all of this surrounds an environment and ecosystem that is built on the idea of trust-less, decentralized transactions. We now have a system, or multiple systems, in which we can send real value to each other without needing to rely on other parties we don't want or trust.

The Conclusion So Far

The definitions and concepts given so far are, in my opinion, what make cryptocurrencies so valuable. The fact that a double-spend is nearly impossible gives these digital assets the rarity property akin to real world physical objects. But, due to its digital nature, they are not susceptible to other issues physical objects have (e.g. weight, mass, degradation, etc.). Furthermore, the ability to transfer these objects without needing intermediaries gives further value to these assets.

Suppose I have a token that is fixed to the value of an ounce of gold. Would I rather have that ounce of gold, which is regulated, heavy, and difficult to transact with, or would I rather have this digital token that can be infinitely flexible to do anything I want with it, regardless of what other people say?

I think, or hope, the answer is obvious. But they cause us to ask other questions:

So how are cryptocurrencies obtained? How do we get our hands on it? How do we participate in this burgeoning technology?

These are important questions, and I'm definitely going to address them. However, I've just realized how incredibly long this post already is, so in the interest of making this primer more readable, I'll just split it into multiple parts.

Hope this was helpful! I'll see you in the next one.

Header Image credit to Pixabay.