Blockchain Basics
A Super Simple Primer and Glossary
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Blockchain and crypto terminology can be intimidating, especially if you're in the early stages of exploration.
Here's a guide, made super simple of course, to help you navigate.
As with the The Web 3 Rabbit Hole, there is thought behind the order in which these terms are demystified. If you choose to read through the whole glossary, it will should function as a great overview of important concepts.
A few entries such as "Blockchain" are foundational to understanding the ecosystem and thus, longer. Everything else is very concise.
Lastly, while it is great to be well-versed with the technical ideas underpinning Web3, it is not crucial. After all, you don’t need to understand how the infrastructure of the internet works to use it, or even build businesses on it.
Table of Contents
Blockchain
Proof of Work
Bitcoin
Satoshi Nakamoto
Fiat Currency
Cryptocurrency
Token
Tokens vs. Cryptocurrencies
Non-Fungible Tokens
Initial Coin Offering
The Gold Standard
TBD
Blockchain
Blockchain is basically 'ledger tech'. A way of maintaining a distributed or decentralized ledger.
Let’s Break It Down
We are already familiar with centralized ledgers, like a bank keeping records of all it's savings accounts and their balances in a secret database on its own servers.
Imagine if instead of being secret, this was a public, editable, google sheet.
This is clearly not going to work, right? After all, everyone would just go and edit their own balance to be 100x.
So we are back to the status quo. We need a central trusted party, like a bank, to be the only one with access and maintain the integrity of a secret ledger.
Not anymore, thanks to blockchain.
Blockchain enables a paradigm where no central authority needs to own, control, or manage the ledger i.e. the database. Instead, it is maintained and secured across a decentralized network of computers using cryptography.
How Does It Work
Each computer in a blockchain network, called a node, maintains a copy of the ledger.
Let’s continue the analogy of the public, editable Google Sheet. Say we need to record a new transaction - Person A sends Person B some money. How do we update everyone’s ledger to reflect the new balances?
If this was actually a Google Sheet, any one with access i.e. any node could do it. But who gets to? And how do all the other nodes trust that node? How to avoid conflicts when two nodes attempt to do it simultaneously?
This is what blockchain solves.
Changes to the ledger i.e. transactions are gathered into "blocks". The block is sent to every node in the network.
The block is then verified and validated by ALL the nodes using a consensus mechanism such as Proof-of-Work (PoW) (more on this in a moment).
Once consensus is achieved, everyone's copy of the ledger updates.
Here is the whole workflow:
Note another key difference from our hypothetical Google Sheet. In Google Sheets, the update is in the form of an instantaneous edit to a table on all the computers. In blockchain, the new block containing the transaction attaches itself on to the previous copy of the ledger.
Let’s Visualize It With Some Grade School Algebra
So far, we have covered the core mechanism.
New Ledger = Old Ledger + New Block
So each block updates the ledger in to a new version.
Ledger v1 = Ledger v0 + Block 1
Ledger v2 = Ledger v1 + Block 2
Ledger v3 = Ledger v2 + Block 3
Which means that:
Ledger v3 = Ledger v0 + Block 1 + Block 2 + Block 3Final step: Start with a blank ledger (ledger v0 is blank). Add all entries as blocks
Ledger v3 = Block 1 + Block 2 + Block 3Generalizing this:
Ledger v99 = Block 1 + Block 2 + Block 3 + .... Block 99
In English:
Current Ledger = Block 1 + Block 2 +.....+ Latest BlockDo you see it yet? Each block is ‘chained’ to the next block. The database is a block chain.
A cryptographic signature ensures each block is set in stone. So despite being public, the blockchain is immutable - once recorded a previous entry cannot be tampered with or reversed.
Proof of Work
Proof-of-Work is the consensus mechanism first popularized by Bitcoin.
Any computer can act as a ‘miner‘, competing globally to solve cryptographic puzzles that demand computer hardware resources.
There is no creativity to solving the puzzle, it just requires a computer to spend crazy processing power attempting to find a solution.
This processing power spent is the 'mining' or 'work'.
The winner of the puzzle gets the right to update the ledger and is rewarded with the network's underlying currency. This mechanism achieves consensus on a decentralized ledger.
Learn more about Proof of Work as well as Proof of Stake in the Super Simple Summary on Vitalik Buterin’s conversation about Ethereum - The Boy Genius and The World Computer
Bitcoin
Bitcoin is a blockchain network. Its native cryptocurrency is also called bitcoin (lower case) or BTC. It is the first blockchain and cryptocurrency.
Bitcoin was created in 2009 by Satoshi Nakomoto — whose real identity is unknown. It pioneered Proof of Work.
Learn more in Super Simple Summaries on Bitcoin by its prominent evangelists - Money Is The Greatest Social Network and Bitcoin Bull (Coming soon)
Satoshi Nakamoto
A pseudonymous individual or group of individuals who created the Bitcoin protocol. Nakamoto first published their white paper describing the project in 2008 and the first Bitcoin software was released one year later.
Fiat Currency
A fiat currency is any type of government-issued currency that is used as legal tender by a specific nation or region’s citizens and government.
Fiat currencies are usually not backed by a physical commodity (like gold or silver), but instead by the government that issued it. As a government-regulated instrument, it functions as a medium of exchange, store of value, and unit of account.
Cryptocurrency
Cryptocurrency is a digital currency or digital asset. It is based on mathematics and uses encryption techniques to regulate the creation of units of currency as well as verifying the transfer of funds.
It can be used as a medium of exchange, like fiat currency but it operates independently of a central bank. Many cryptocurrencies such as bitcoin are decentralized networks based on blockchain technology
Fungible
Fungibility is the attribute of being mutually interchangeable. Fungibility occurs when a good, asset, or units of an asset are indistinguishable from each other, and so can be interchanged with each other.
For instance, one US dollar is equivalent to any other US dollar, and is therefore fungible. Fungibility makes an asset useful as a currency or payment method.
Artwork is usually deemed non-fungible as paintings, sculptures, or masterpieces are likely to be unequal in quality or value.
Token
A token represents an asset built on a blockchain.
Tokens are the primary means of transferring and storing value on a blockchain network. Tokens can also be designed to be either fungible or non-fungible, depending on a network's specific needs.
Learn more in Super Simple Summaries on Tokens - Tokens Are The New Website and The Wonders Of Web 3.0 (Coming soon)
Tokens vs cryptocurrencies
They are both digital assets.
Cryptocurrencies are the native asset of the blockchain. For eg. BTC or ETH.
Tokens (in this case crypto-tokens) are created as part of a platform that is built on an existing blockchain.
Cryptocurrencies are always fungible. Tokens can be fungible or non-fungible.
A loose web 2 gaming analogy might help —
To buy an iOS game on the App Store on my iPhone, I need to spend USD. This is the native ‘asset class’ to transact on the App Store (fiat currency), just like most commerce in the world right now.
However, while playing the game, I might get some in-game currency, like coins or diamonds. This is analogous to tokens. The game, a platform built on iOS and distributed on the app store, is using it’s own centralized unit of account. They may give some to me for free, allow me to buy some with USD and maybe even send to my friends.
Non-Fungible Token
A non-fungible token is a type of token that is a unique digital asset and has no equal token. This is in contrast to cryptocurrencies like ether that are fungible in nature.
Learn more through Super Simple Summaries on NFTs - All About NFTs and The Wonders Of Web 3.0 (Coming soon)
Initial coin offering (ICO)
An ICO is a mechanism used to raise external funding through the emission of tokens in exchange for cryptocurrencies. It is often a form of crowdfunding, but a private ICO that does not seek investment is also possible.
The Gold Standard
The prevalent system before fiat money. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. That fixed price is used to determine the value of the currency.
For example, if the U.S. sets the price of gold at $500 an ounce, the value of the dollar would be 1/500th of an ounce of gold.
The gold standard formed the basis of the international currency market until the 20th century (abandoned completely by the US in the 1970s).
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