An Overview Of Blockchain And Cryptocurrencies

January, 2022

As our world constantly changes and evolves, so does our economy. As problems arise, we make changes to solve them, and they fade away again. This article covers what I think the logical next step in our currency is. But before I talk about that, let's go back in time and look at a bit of history.

What is currency?

We first started with a trading system, every object or thing could be traded with someone if you wanted their items, and they wanted one of yours. You would both agree and eventually trade. The problem with a system like bargaining is that some produce expires.

It often happened that people would trade for food. If a farmer and a fisherman wanted to trade, a problem would arise. The farmer collects food once or twice a year, whereas the fisherman collects food week over week. If the farmer wanted some fish, he would have been unable to trade since he had not harvested yet. And if the fisherman wanted crops, by the time it came time to trade, most of his stock would have gone bad.

Eventually, the idea of solid, non-perishable, common currencies came about. The farmer could buy fish with the currency, and eventually, the fisherman could buy from the farmer using the same currency. These currencies only work if everyone agrees they are worth something. These first solid currencies are often objects of value, like cowrie shells or gold, because it makes sense for those objects to be worth something (they look pretty). As people started to adopt this new currency, a new problem was raised. These objects are heavy to carry around everywhere.

Therefore, banks started cropping up. You could go deposit gold and get a bank slip saying that the bank owed you that much gold. These slips gained their own value because anyone could go redeem them. Why go back to the bank to get gold if you can just give this piece of paper to someone and let them do it? This system lasted for a bit until we finally de-attached the promise of getting gold from the papers, which turned the papers themselves into the currency.

And now we're here. The currency is only as valuable as the world perceives it to be. There's no reason for our pieces of paper to be worth anything. The only reason they are is that we all agree it's true. Now we are noticing new problems with our current system.

It's centralized, nationalized, and outdated. I believe all three of these problems can be solved by using cryptocurrencies on a blockchain.

What's a blockchain?

A blockchain is an immutable, decentralized network. Let's walk through that one word at a time.

Immutable

Immutable means it cannot be changed. Once something is added to a blockchain, it stays on the blockchain forever. This happens because the blockchain is stored in clusters of knowledge referencing each other. The clusters are the blocks, and the references are the chain.

Each block has a code given to it, which allows other blocks to reference it. When a block calculates its own code, it takes the previous block's code as an input to generate its own. It also references the previous's block's code.

So if you change one block's hash, then the reference of the next block leads nowhere, and the chain is broken. When the chain breaks, we know something is wrong. Another way this breaks the chain is if a block used the previous's block's code to calculate its own. If the past code is changed, when you re-calculate your present code, it won't be the same, and the chain is broken again.

In conclusion, the blockchain does not enjoy being changed.

Decentralized

Decentralized means that there is no one person or cooperation who owns the blockchain. It's owned and powered by the very users themselves. Instead of a few big corporations like Google, Facebook, Amazon etc… Controlling how the web evolves, it is the people who use and power it.

What do I mean by power it?

The blockchain works because of consensus algorithms. Because it is decentralized, as a network of people, we need to agree on what is real and what is not: We must come to a consensus.

Different blockchains run different consensus algorithms, but the two most common ones are proof of work (PoW) and proof of stake (PoS). (I wrote a separate article on these, so I won't go too deep)

Proof of Work

In proof of work, validator nodes which are the people who run the network, dedicate their computing power to maintain the network. As transactions are clustered together into a block, it is a validator's job to confirm the transactions and add them to the chain.

In proof of work, we refer to validators as "miners" and the act of confirming a block as "mining the block."

When a block is added, miners compete to solve a difficult cryptographic puzzle attached to it. The only way to solve this puzzle is to guess random numbers until you find the one that works. The more computing power you have, the more guesses you can make. The amount of guesses you make is referred to as your hash rate. (hashes per second: h/s)

When you guess the answer correctly, you get to add the block to the chain and get a reward.

Proof of Stake

In proof of stake, instead of dedicating computational power to the network, you stake some of your currency (what currency? I'll explain in the next section). Then, the algorithm chooses who gets to validate the next block based on how much each account has staked, how long it's been staked for, and randomness.

In proof of stake, the validators are referred to as "forgers," and the act of validating a block is called "forging a block."

If forger one and forger 2 staked their currency at approximately the same time, and forger 1 staked 10$ whereas forger 2 staked 1000$. Forger 2 would have 100x more chances of being chosen to validate the block.

We then incentivize the forgers to act in goodwill for the network by adding a consequence for approving fraudulent blocks. If a forger forges a fraudulent block, all of the currency they have staked is lost, and they are banned from staking again. This is known as slashing.

Network

Well, it's on the internet. Applications of blockchain and decentralized internet are often referred to as web 3.0. Blockchain allows us to process transactions and run apps on a network owned by everyone.

Because it's a network, it also runs globally. Anyone can use, validate, and create on the blockchain.

What's a cryptocurrency?

A cryptocurrency is basically just a currency that functions on the blockchain. There are a few benefits to running a currency this way. The currency is also decentralized, there's no middle man in transactions, and it's a global currency that can be used anywhere.

Benefits

The currency itself is decentralized. There is no authority who controls the currency. No one is capable of simply blocking your transactions (technically, the code can, but the code is often open-source, so you can find out why it's being blocked)

Because the currency is decentralized across the web, it's a global currency. You no longer need to convert USD into CAD or CAD into Euros if you want to use it in different areas of the world.

And finally, there's no middle man in transactions. When you send someone money, it doesn't have to go through a bank or any kind of payment processor. It's sent directly to the address you want it sent to.

Transactions are public too. At any time, you can check all the transactions related to an account using their public wallet address. However, this isn't always true.

A lot of specifics change from blockchain to blockchain.

Popular Currencies

Bitcoin

Bitcoin was the first cryptocurrency created, and it is currently the largest cryptocurrency by market cap. It was created anonymously by Satoshi Nakamoto, who still remains unknown to this day. Bitcoin runs on a proof of work system, which requires a LOT of computational power to mine just one bitcoin.

Ethereum

The Ethereum network introduced something new to the blockchain space after Bitcoin. It introduced smart contracts. I'll be writing a more in-depth overview of smart contracts soon (but for now, here's a quick description)

Smart contracts allow so much more to happen on a blockchain than keeping track of a currency. With the introduction of smart contracts, people could start building their own apps on the blockchain. This created a huge boom of interest in the crypto space.

Other than smart contracts, Ethereum's main coin, Ether, also holds the 2nd largest market cap in crypto. Ethereum also runs on a proof of work but is soon planning to change to a proof of stake system in Ethereum 2.0, which is said to launch in 2022 (soon).

Dai

Dai is another currency that runs on the Ethereum network. It's known as a stable coin, meaning its value is pinned to the value of a physical currency. Dai is pinned to the US dollar, so 1 Dai = 1 USD.

Solana

Solana is a newer blockchain focused on the speed and cost of transactions. Whenever you send a transaction on a blockchain, you need to pay a fee called the gas fee. This fee keeps the network running as it is usually recycled into rewards for the validators.

Transactions on Ethereum can take a few seconds to pass through, whereas, on Solana, it takes around 400 milliseconds. It's almost instant. On top of the extremely fast transactions, the fees are incredibly low.

Ethereum gas fees are at an all-time high at the moment, and transactions can cost up to an extra hundred dollars in gas. On Solana, the fee is usually less than a penny.

The negative side of Solana is that it's centralized to an extent. A lot of the circulating currency is owned by insiders, + most of the validators are also from the company. Meaning if the company shuts down, chances are the network will too.

Monero

Monero is another proof of work blockchain, but this one is focused on keeping complete privacy. Most blockchains allow anyone to see the details of any transaction. Who sent it to where. Monero is completely blocked and doesn't allow anyone to see.

I actually built a Monero miner on a Raspberry Pi. If you want to check that out, you can watch this video!

I believe blockchain and cryptocurrencies will revolutionize how we view, think and interact with money. As time passes, we develop new systems and ecosystems to match our needs. The world is moving towards a digital era. It doesn't make sense to keep our money physical anymore.