One thing you should try to understand is there are digital currencies, and there is blockchain. Blockchain is the infrastructure that all of these digital currencies are built upon.
Most people talk about bitcoin (digital currency) in the same light as they would blockchain, using the two concurrently as if one is the other and both are the same. However, Blockchain is not bitcoin. bitcoin is only but a piece of the miracle of the blockchain. I will get to this later in the discussion.
Because we are all newbies, here is the blockchain explained in newbies terms.
When talking about blockchain, we are talking about decentralisation. You know how you go to the bank to make transactions? Say, you want to send some money to your loved one, or to your business partner, you have to use the bank as a financial intermediary. Because, how can you send the money through the air? Right? But then, blockchain comes with decentralisation and makes it possible to send currencies without needing any third party. So, what blockchain basically does is remove every third party between the sender and the receiver, which is the true purpose of what was proposed in 2008 by Satoshi Nakamoto, the person who invented bitcoin in his Bitcoin: A Peer-to-Peer Electronic Cash System. But I digress.
Again, let’s look at it this way. You have #100 to spend on some oranges. I have some oranges to sell. So, we make the transfer. Now, you have the oranges and I got your #100. We know this transfer happened because we ordered the transaction and you can attest to that. We did not need anybody to be the intermediary over the transfer and confirm that the transfer did happen. Now, the oranges I sold to you are yours to control. If you wish, you could throw them away or give them to anybody. We could have the same transfer with books, paintings, foodstuff, applications, money. Anything! And they’d still be done the same way.
Blockchain Solves the Double Spend Problem
There is a bit of a problem though. I have your #100 but how am I sure that I am the only person who has this same #100. How can I be sure that there are no copies of this same #100 out there? Double spending is an error whereby the same single digital currency is spent more than once
The same money ought not to be spent more than once because this would lead to inflation as is in the case of fake traditional currency in circulation. Counterfeit money is money that does not exist in the record but still exists anyway.
It is very possible that digital currencies can be spent more than once because of the nature in which they have been built. This nature involves having a digital file that can be cloned and distributed. The double spend problem is a problem that digital currencies have been having until the advent of blockchain.
Bitcoin: The Block of Chains
In 2008, a person, under the pseudonym, ‘Satoshi Nakamoto’ proposed “Bitcoin: A Peer-to-Peer Electronic Cash System.”
Would it confuse you if I told you that the ‘Bitcoin’ Satoshi proposed was the first blockchain? Thing is, in Satoshi’s proposal, Bitcoin ( with a capital B) is the blockchain while bitcoin (with a small b) is the first cryptocurrency. There have been other cryptocurrencies since the inception of bitcoin, for example, ether is a cryptocurrency which was built upon Ethereum, a blockchain. (I will discuss digital currencies in the next chat)
Now, what if there was a spreadsheet in which all these transactions are tracked? A document that has a record of the history of transactions we’ve made and this history lives in everybody’s computer such that nobody could tamper with any record in one computer. It would not be possible for you to send money that has clones of it elsewhere because it wouldn’t sync with everybody’s computer. The synchronization that happens with everybody’s computer is called a ‘consensus’. It is so because every computer has to agree before a transaction is made. This system is bigger than anybody that you can’t cheat it. There are people who make sure that everything goes according to plan and these people are called ‘miners’. They sign up voluntarily and they are paid some token for managing the affairs of the system. One of such miners cannot decide to have a token to himself just because. The rules have been written from the very beginning and this is why it is called the Block of Chains.
Now, What is Blockchain?
Taking the explanation up a notch, blockchain is basically a decentralised system that spreads across all databases through a network of nodes. This simply means that there is no ‘single server’ that stores blockchain data. The main purpose of Blockchain in Satoshi’s whitepaper was to allow fast and secure ‘peer to peer’ transactions. Unlike our traditional system of storing data, Blockchain is built on trust, it is faster, and it does not have a central authority that it answers to.
In summary, blockchain is not bitcoin. Bitcoin is a digital currency; one of the digital currencies built on the blockchain technology. Blockchain is solving a lot of problems and I hope we are able to understand this basic explanation of what blockchain is all about.
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