With the introduction of Blockchain to our technology life, it became necessary to have some keys to understand the chain. There is no one golden key to understand blockchain.
Here is some of these for beginners from scratch:
A blockchain, originally block chain, is a continuously growing list of records, called blocks, which are linked and secured using cryptography.
As in the Wikipedia definition, we are talking about the set of a list that carries data. Actually, the term blockchain is in our lives for almost 30 years with distributed systems. However, the changing needs with the development of technology have caused this concept to enter into our lives. That is why blockchain also called as “The Internet 3.0”.
The main point is the way of how the system works. Unlike the technology we use today, blockchain works distributed which means there is no single point that all computing runs in that. There are several computational entities (nodes) in the chain (set of blocks) which are communicated among themselves and share each step of the computation. The communication and coordination between nodes control by the distributed systems algorithm.
The block is the structure that stores transactional data. Each block linked the previous and next one and this relation create the chain of blocks or in other words blockchain.
For the better understanding, here is the visualization of what a block looks like:
As in the figure above, each block has a set of structured data. Each transaction signed with the timestamp and hashed. The block also stores its own hash, it is like identification of the transaction. The next block identifies the previous one with the previous one’s hash. But the first block named different from the others, Genesis Block. It is special because it has not a previous block’s hash.
Also the data in the block stored with encryption. If you try to read the data of a block, you see a meaningless set of characters. The hashing of the block and the encryption of the data are different things. The encrypted data can be reversed or decrypted using a specific key, but hashing cannot. There are several different hashing functions such as MD5, SHA1, and SHA-256. Different blockchain algorithms use different hashing algorithms, for example, Bitcoin uses SHA-256 which is harder to decrypt the data.
Blocks in the chain cannot be created by themselves. Each of these is an outcome of completed transaction records. In blockchain, there is a need for computation power to complete each transaction. This computation occurs with solving cryptographic hash algorithm and this is called the Proof of Work (PoW).
The meaning of the blockchain mining is really similar to mineral mining. When you complete the computation of a transaction, you will receive a reward. The amount of the reward is related to the which chain are you in, the coin type, and the complexity of a problem. For example, if you are doing Bitcoin mining, the Bitcoin blockchain uses your CPU computation power to solve problems. Each operation you solve brings some amount of Bitcoin (or Satoshi).
The figure above is the demonstration of computation of a transaction. The main purpose is making the block hash’s beginning with a certain number of zeroes. Zero means you complete the Proof of Work for that block. Since transactions are done by nodes singularly, the data that a block has cannot be changed or reversed by another node. We can say that blockchain data cannot be hacked. The only known way of the reverse transactions is to have more than 51% of the network computation power.
If you watched Silicon Valley movie season finale (Spoiler alert!!!), the main struggle is to have the control of the chain. It is both possible and impossible to have all control of a chain with the majority of the computation power. Considering the complexity is increasing after each block added on the chain, you need a really huge amount of computation power. For example, if you want to hack Bitcoin blockchain, it means you need to have more power than miners all around the world right now. If you achieve this, you can control all blocks in the chain theoretically. A control means the ability to revive transaction history and prevent or manipulate new transactions confirmations.
Cryptocurrency Coin / Token
Cryptocurrencies are digital currencies that are beginning to take place in our lives in the last few years. Cryptocurrency coin (or just coin) uses its own platform, for example, Bitcoin or Ethereum. It can run independently from other platforms.
Here are the most popular coin list according to Coinmarketcap:
If a digital currency is built on top of existing blockchain or another protocol, it is called a token. Usually, tokens are used for operating expenses for the protocol’s services.
If we check the token list, we can see that the table is totally different:
You can see each token includes the information of the own platform, unlike coins. Tokens also have to meet the standards of the structure to which it is attached. For example, if you want to create a token on the top of Ethereum blockchain, you have to define the specialty and capability in the Smart Contract.
Initial Coin Offering (ICO)
Actually, it is very similar to Initial Public Offering (IPO) for stocks with some basic difference. Initial Coin Offering (ICO) is a fundraising mechanism which is commonly happening as crowdfunding. The main difference between IPO and ICO is that investors are received tokens instead of stocks of a company. In today’s world, the valuation of stocks determines the valuation of the company. In blockchain world, the token’s valuation determines the project’s or company’s valuation. You see it is a very similar concept.
Making ICO has some regulations depending on the platform that token is built on top of it and the country that the country where the company is subject to the law. Today, there are some laws being created in many countries. Attending an ICO requires to buy tokens using coins. If you want to attend an ICO that the token is built on the top of Ethereum, you need to have Ethereum first and then you can buy tokens with Ethereum.
A smart contract is a protocol developed to remove the intermediary system for payment processes. In a smart contract, there shuld be information about the token type, money exchange, profit and commision sharing, etc. In short, smart contracts are digital contracts, that has irreversible and trackable, is created to define relations between parties.
(Bonus) Satoshi Nakamoto
Sorry guys I do not even know who he is but not this man.