Simply put, blockchain technology is a series of blocks which are full of transaction histories that are linked, or chained, together to form a complete ledger and all the surrounding technology.

  • Why is there a need for blockchain currencies?
  • Bitcoin, a blockchain currency, was designed by an unknown person who goes by the name of Satoshi Nakamoto. The goals with Bitcoin were to create a decentralized and defalting currency, fix the double spend problem, remove intermediaries, and encourage miners to mine coins.

  • Why decentralize the currency?
  • If you have a bank account, then your bank and bank account are what is called a centralized system. This means that a centralized entity, the bank in this example, controls everything. They can take your money, transfer your money, secure your money, etc. Everything you do with your money is done through your bank, which you have to inherently trust. The idea was to make a decentralized system in which no one entity controls a currency and where trust is not needed because it is built into the system. Decentralizing a currency removes any intermidiaries from handling the currency and charging a fee for doing so.

  • What is hashing?
  • Hashing is the transformation of a string of characters or data into a usually shorter fixed-length value or key that represents the original string. This may sound complicated but we can explain this. Hashing is a mathmatical way to look at every bit or piece of data and to come up with a string of numbers and letters that represent the exact original. Lets say we take this webpage and hash it using a SHA-256 algorithm. The algorithm will create a 256 character long string of letters a numbers, called the hash, that is modified mathmatically by every bit or piece of data in the web page. If 1 piece of data is changed or moved, the entire 256 character hash will change. This can be used to show this webpage is original because anyone can hash it using SHA-256 and get the same hash result, unless the webpage was changed in any way, shape, or form.

  • What do miners do on the blockchain?
  • Miners do a few things. First, they process transactions, the sending of coins from point A to point B. Secondly, they hash blocks of transactions looking for a random number also called a nonce. Thirdly, when the correct nonce is found, they write the block and broadcast to all other miners that the block's nonce was found which starts the process over.

    What is in a Block? - A block consists of all the current transaction data and the block header which contains client version, the hash of the previous block, a merkle root (hash of all transaction data), timestamp, a number representing the network difficulty, and a random number called the nonce.

    Why the previous block's hash? - The previous blocks hash is included in the current block so that if somone tried to cheat the system, the hash result for this block and every single block after this block are incorrect causing the entire set of blocks to be thrown out.

    The Nonce - This is a random number put into the block header. The miner will attempt to guess this random number and will hash this with all the information in header and the transactions. The miner then takes this hash and compares it to the the current block hash. If the numbers do not match the miner will try again. This continues until a miner somewhere on the network makes the correct guess.

    The network difficulty - The more miners that are on the network, the faster blocks will be found. The network difficutly number was desgined to change depending on how many total hashes are being guessed per second by the entire network. The difficulty number does exactly what it sounds like it does. The difficulty will cause the mathmatics to be either harder or easier so that a block is found at a given time interval. In the case of Bitcoin it is every 10 minutes.

    Miner guesses the correct nonce - When a miner guesses the nonce correctly and the hash matches, the block is written to the blockchain and can never be modified. The miner that found the correct nonce is rewarded coins by the network for guessing correctly. This is the only way new coins are made, or minted.

    The double spend problem - Imagine you have 25 bitcoins and you try to send 25 bitcoins to John and 25 bitcoins to Mary at the same time. This is called the double spend problem. In a centrallized system, your bank would do this for you because they control every aspect of your account. The blockchain solves this by breaking up the transactions into blocks. If you spent the same bitcoin at the same time in the same block, only the bitcoin that gets confirmed first will actually be transacted while the other is dropped or ignored. This is why when recieving bitcoin, you should wait for at least 6 subsequent blocks to be confirmed after you recieve any bitcoin to consider the transaction to be complete.

  • What is a deflating currency?
  • Lets talk about inflation first. When we talk about fiat currencies like the US Dollar, the central bank creates more bills at a rate that they decide. This inherently decreases the value of the bills you currently hold. This is called inflation. The US Dollar's inflation is about 2% every year, which means your money is worth 2% less every year. When talking about Bitcoin and many other cryptocurrencies, new coins are only created at a predetermined interval. Coins recieved by a miner who guesses the nonce correctly is the only way most cryptocurrencies creat new coins. In the case of Bitcoin, this new coin creation is halved every 210,000 blocks (about every 4 years). The supply of new coins decreases every 4 years. This is called a deflating currency. The inflation rate decreases over time.