Thursday, February 18, 2021

Blockchain & Bitcoin et al - Making Sense of Cryptocurrency (2)

 It is quite easy to understand Blockchain. 

Blockchain, essentially is an accounting ledger that records currency transactions. More specifically it is a cashbook, for a specific currency like Bitcoin, that records who pay how much to who. 

However, this cashbook called blockchain, works in a computer network and uses a different method to record payment transactions:


Anyone who participates in the currency transactions can choose to keep a copy of this cashbook in a computer or server connected to the network. All copies kept by various participants are 100% identical containing full records of transactions since the first day of the creation of this currency until the latest payment. When one person initiates a new transfer, this payment record will be updated to everyone’s copy of the cashbook.

This means we don’t need a trusted accountant to record payment transactions. Since everyone has an 100% identical copy of the full cashbook, no one can perform fraud by changing just his own copy of the cashbook.  


To prevent people from amending recorded payment transactions (and to prevent the same amendment made to everyone else copies), the payment transactions are recorded in an encrypted way. The encrypted payment records are a series of jumbled up meaningless alphanumeric characters, encrypted text. Multiple payments are grouped into one BLOCK and be encrypted into encrypted text. The first block of payments and second block of payments will be encrypted into one series of encrypted text. The second block of payments and third block of payments will be encrypted into second series of encrypted text, etc. This structure is like a…CHAIN. This is how the name Blockchain came from. 


When one initiates a payment, it records the payment amount transferred from an address controlled by him to another address controlled by the recipient. This payment record (grouped and encrypted with other payments into an encrypted text) needs to be verified before it can be updated to everyone else cashbook copies. This verifying processing is called mining. The person who initiates the payment will have a fraction of the payment be deducted as transaction fee, and the miner, the first person who managed to verify the transaction, will earn the transaction fee. 


With an encrypted cashbook with thousands of identical copies owned by everyone, Blockchain is a payment system or currency records that can be trusted by everyone.  

Do you realise you don’t need a bank to keep your currency anymore? You just need to logon to the network to have access to your currency address (which is called wallet or account). 

Do you realise we don’t need Central Bank to control money circulation anymore? The rules on quantity of the currency has long been established when the currency is being created (programming development). Currency with bad quantity rules will not survive.

Blockchain enables a community to self-manage and govern money without authority figure to manage the authenticity of the money supplied to the community. Therefore it is such a revolutionary and brilliant invention. 

When we look at today numbers of cryptocurrency, i.e. Bitcoin, Dogecoim, Ethereum, etc. not all will survive. But blockchain, the cashbook recording technology that enables these coins, will become an essential part of our economy.

1. Bitcoin et al - Making Sense of Cryptocurrency
2. Blockchain & Bitcoin et al - Making Sense of Cryptocurrency (2)