Welcome to the first of many posts for Cryptolume’s Crypto Academy! The Crypto Academy is an initiative run by Cryptolume in order to bring about more Blockchain awareness. This is a work in progress that is constantly being improved by feedback from users such as yourself. If you have any questions, feel free to comment below. The Crypto Academy will always be free and available to anyone who wishes to learn more about the fundamentals of Blockchain Technology and Cryptocurrencies.
Notice: There may be some terms that may not make a lot of sense to you right now if you’re not lingual in tech, however don’t worry as they will be covered throughout the whole academy and a final summary/test will be available to test your skills interactively to ensure you’ve captured the right knowledge.
What is Blockchain Technology?
The Blockchain is an ingenious technology that sprouted after the financial crisis of 2008. We’re guessing you’ve heard of Bitcoin and that’s why you’re here right? Well Bitcoin is based on Blockchain technology and it was created by an anonymous group/person only known by the pseudonym, Satoshi Nakamoto.
Bitcoin is based on cryptography (thus the term cryptocurrencies you hear so often). Cryptography uses mathematical equations (algorithms) and secret encryption keys (sequence of characters, can be letters numbers, etc) to provide secrecy and integrity to our data. Encryption keys are used for scrambling and unscrambling data, such as passwords when you sign up to a website.
Encryption keys are build with algorithms through mathematical equations to ensure that every key is different and unpredictable.
Ok, now let’s slow down a bit. Let’s get a complete understanding of the Blockchain in layman’s terms.
At first glance blockchain is quite transparent, and may not seem different to current methods of technology implementation. Think Facebook for a moment here. Everyday people are posting on Facebook and storing information there such as their memories, their posts etc. However at a moments notice, the staff of Facebook can remove your posts or completely disable your account whenever they see fit.
In comes the Blockchain, with Blockchain Technology the same basically happens however – there’s a greater consensus on how the information is amended and updated. To understand how this is done, we must first understand how Facebook and other centralized systems work (Blockchain is decentralized technology, but more on that soon). With Facebook, all of yours and everyone else’s information is stored on the Facebook database which exists in their centralized ecosystem that is completely run and controlled by the authority – Facebook.
This means, that your data is never really yours and that you don’t have a say in how secure it is. This is the same with most centralized systems – think banks, you probably have a $1,000 or $2,000 daily withdrawal limit imposed on you by your bank to withdraw at any given time because they’re in control when it comes right down to it.
Needless to say, this doesn’t mean that “centralized” systems are necessarily bad. Many of them are great at securing our data in the current era and that’s why we trust them. That’s why we will continue to do so, until a new and emerging technology can take over. The probability of this being Bitcoin however is unknown at this stage as it is all still very speculative and volatile, however blockchain is here to stay. Centralized systems make use of encryption technology as well which means that it’s quite secure, however there is still an authority and a central system that can be controlled and modified.
The distributed database that is, The Blockchain is a decentralized database of information that can be used to store data as well as send assets from one location to another via public encryption keys known as a public address which is derived from the private key. Your private and public keys belongs only to you and is unique to you. Let’s say for example you were using Bitcoin and you wanted to send your Bitcoin to your friend. You would send the Bitcoin from your wallet (Which is tied to your private key, meaning only you can manage it and it’s contents) to your friends public address (Which is the public key, basically.). Your friend would then receive the assets (coins) via the Blockchain. The same works in reverse. You never share your private key with anyone, doing so can have your coins taken within a minute. We’ll cover more on security in later topics of the Crypto Academy.
How does Blockchain work?
Despite the public not knowing, Bitcoin’s success comes to Blockchain, the brainchild of Satoshi Nakamoto. The main characteristics of the blockchain are that it is secure from a central authority tampering with the data (or in the case of finance, printing more money and increasing the circulating supply).
The main function of the Blockchain is to certify transactions, and to confirm that they’ve actually happened. Now what do we mean by a transaction? A transaction could mean anything from you tapping your credit card at the supermarket, to you filing a complaint at the DA’s office. All of these go through computer protocols and programming which creates a transaction, and a transaction id that can be used to trace back to it. Blockchain is the same, however with centralised systems you rely on the central system to ensure that the transaction has gone through and processed. With Blockchain, you guarantee it, even though there is no central authority.
How does the Blockchain do this? It does this by storing all of these transactions in what’s called a ledger. Each blockchain transaction and subsequent transaction id is stored inside the Blockchain and it is absolute, it cannot be deleted and it cannot be tampered with unless there is a global consensus to do so by the supporters of the blockchain. Now earlier, we mentioned that blockchain is based on peer to peer technology, which you can basically think of as sharing. Whenever you send a file to a friend via messenger, or Skype you are communicating with that person in order to pass the file through. Yes, Skype etc are centralised technologies, so they do have your file in this case however that’s outside the point of this example.
This is basically in a simple way of explaining it, peer to peer technology. Normally, peer to peer technology doesn’t have a central authority such as Skype, so an ideal peer to peer communication would be using something such as BitTorrent if you’ve ever heard of it. This allows you to hold a file on your computer, and share it with the outside world. They connect into your node and download the file from you. Blockchain works similar in a sense, and it is also decentralized, just like BitTorrent. Many computers are connected to the same Blockchain protocol, and have an updated version of the ledger.
The data stored in Blockchain is based on cryptographic blocks connected in a hierarchical manner to each other, this creates endless chains of blocks and starts to look just like a spider’s web. This allows you to go back and trace and transactions/transaction id’s ever made on the blockchain. Including your own. However, don’t fear there is some anonymity behind it. No one will know your name, all transactions are only known as cryptographic keys and transaction id’s. This is all happening in the background, however it is fundamental knowledge of how the Blockchain works. The primary function therefore is to certify transactions between people or rather, two different addresses in the case of Bitcoin (And remember, it’s your public not your private address!).
Once transactions are made and verified by the network, it is not possible to go back and modify the timestamp or the contents of the transaction. This creates an immutable piece of evidence that this transaction indisputably took place on the Blockchain. The financial industry has the most active users in Blockchain due to amazing irreversibility of it. It also allows for low-cost instant worldwide transactions, because as soon as a transaction is confirmed by the Blockchain network for let’s say Bitcoin as an example, it is available on the other end.
There are many different ways a Blockchain can get updated, most typically this is done by the miners of the given Blockchain or Cryptocurrency/Token. This will be covered later on in the Crypto Academy, and don’t worry if this was too much information to start with – it’ll only get easier and hopefully we can help you get there faster.
What happened during the 2008 Financial Crisis?
In the U.S.A, banks were giving out risky loans to bring in more customers and generate profits. However, due to the nature of the background checks conducted the loans were very risky. Subsequently a majority of people were unable to pay back their loans and the banks received increased defaults. Afterwards banks were forced to file for bankruptcy as citizens were unable to pay their loans back. Not only this, but the banks were also using the people’s money for investment banking. Quite a number of these ventures failed and many customers were out of pockets as they trusted their banks with their money, only to be let down. A real problem was born. One that has been around for a while but with the rise of the digital revolution and social media people are starting to become a lot more aware.
This created a knock on effect across the entire country with massive dissatisfaction, the government tried to intervene and resume normal function however the everlasting damage was done and not only did it impact the states, it put the entire world into pause. This is one of the many reasons that people use gold as a store of value, in order to litigate as much damage as possible should a centralized system crash and burn. In order to solve this problem, we go back to the age old money issue. Printing more money. The problem with printing more money is that it puts more into circulation, reducing the value of the asset.
The most simplest way to put this is to say that there is $1,000 dollars in circulation only, across everyone. You own 10% in this example, being $100. Now, the centralized authority realises that it needs more money, it will go right ahead and make more. However, you don’t get a piece of the pie, instead the authority prints $1,000 more making the circulating supply $2,000. You are left with 5% of the value you once had with the $100 that you own as the total market share is now $2,000.
And finally, Bitcoin was born.
People were after a currency that would not be owned by a central authority, one that could take their life’s work to the ground. And fair point at that. Printing more money was not going to solve the problem, and events repeating themselves would be not completely ruled out. People were and are increasingly starting to get worried about the value of their money, what if the next crash was even larger? How would people get out of such a racquet?
Bitcoin, as an example here solves this problem by having a fixed number of Bitcoin that will ever be in supply. This is possible because of software code and algorithmic calculations that are hard-wired into the protocol. This ensures that the price of Bitcoin was dependant on the supply and demand of the market. Later on in the series we’ll talk about how this can scale globally, and what a “Satoshi” is. For now, we’ll stick to the basics and advance further in the Crypto Academy. The irreversibility an immutability on Bitcoin, instills trust in the greater worldwide community again. If it doesn’t take over as a global currency, at least it’s setting us on the right path of financial knowledge and how many works in the world. Thank you, Blockchain!
The answers to these questions, will be posted on the bottom of the page of the next page in Cryptolume’s Crypto Academy. Feel free to save them on a notepad, or keep them in your head until you go to the next step.
Question 1: I can undo my transaction if I send someone Bitcoin by mistake.
Answer with True/False
Question 2: A centralized system can take control of my information whenever they please, if they wanted to.
Answer with True/False
Question 3: You always share your private key, you keep your public key safe.
Answer with True/False