The Core Technology Behind Cryptocurrency

I’m going to tell you honestly right now, cryptocurrency is not a simple topic at all. However, I’m going to give you an as simple as possible, yet detailed, explanation about the technology at the core of cryptocurrency. We’re going to thoroughly discuss the building blocks of cryptocurrency: “blockchain technology“.

This guide will cover not only what blockchain technology is, but why it’s significant to our world. We’ll find out what all the hype is about.

“Blockchain Technology” vs “Bitcoin”

Beginners to cryptocurrency sometimes hear the word “blockchain” and think that the term blockchain is synonymous with Bitcoin. However, this would be like saying that “smartphone technology” and “Apple” have the same meaning.

The relationship between Bitcoin and blockchain technology is like the relationship between Ford and the combustion engine. Bitcoin is based on blockchain technology and could not exist without blockchain technology. Blockchain technology preceded Bitcoin and blockchain technology could exist without Bitcoin. Just like a Ford car has an engine, Bitcoin has a blockchain. A Ford car couldn’t work without its engine; Bitcoin couldn’t work without its blockchain.

The invention of the combustion engine allowed cars to exist. The invention of the blockchain allowed Bitcoin to exist.

So what exactly is a blockchain?

What Is a Blockchain?

A Visual Image of a Blockchain

Before we get into the details, let’s get a visual image of it in our minds. So, picture this, there is a digital “block” that’s created on the internet. Inside that block is data. For cryptocurrencies, text data of a list of transactions is inside of each block. For NFTs, text data detailing ownership of digital assets is inside of each block. Every time a new block is created, it is linked (chained) back to the previous block, so you have a series of blocks, full of data, all chained together to each other.

A series of digital “blocks”, full of data and chained to one another is one way to visualize a blockchain.

Another way to visualize it is like this: Picture each block as a page in a book, the data inside each block are the words on the page, and the chain is the book’s spine that holds all of the pages together.

Each page is like a block, the words on each page are like the data inside each block and the spine of the book is like the chain linking all of the blocks together.

There are various different cryptocurrencies, each with its own blockchain. For the blockchains of cryptocurrencies, the data inside each block is a detailed record of transactions involving that specific cryptocurrency. Basically, each block is one page in a digital ledger.

How Are New Blocks Added to the Chain?

In order to add a new block to a chain; a complex math equation must be solved. For Bitcoin’s blockchain, basically somebody needs to guess a number between 1 and 4 billion (roughly) in order to add a block to the blockchain. This requires a vast amount of computing power, as well as some time (roughly 10 minutes per block on Bitcoin’s blockchain).

The individual (or group) who guesses the correct number creates the new block and is awarded 6.25 bitcoins ($356,500 USD – Nov 30, 2021). This process is called “mining“. But really it’s should be called something like “creating a new block by guessing the correct number“.

For Bitcoin, the first individual (or group) who guesses a number between 1 and 4 billion (roughly) gets to add a new block to the blockchain and gets awarded 6.25 bitcoins (in 2021). It’s kind of similar to a lottery.

The fact that it is so difficult to add a new block makes it so that no one organization can ever add too many blocks in a row; it would be like the same person winning the lottery over and over again. The fact that blocks are so difficult to create is also the reason why they are so tamperproof and immutable.

So now we know what a blockchain is, how blocks are created and what each block is filled with (a digital ledger of transactions). To understand the significance of blockchain technology, let’s first go back in time and look at ledgers and their function.

Ledgers & Their Function

The History of Ledgers

A ledger is simply a documented record of transactions. A blockchain is a ledger. A blockchain is a documented record of transactions.

So if it’s that simple, then why is blockchain technology such as big deal? To help understand why, let’s take a look at the history of ledgers.

Since the dawn of civilization, people have been trading things with one another; humanity probably wouldn’t exist if it weren’t for the fact that humans trade with one another. Even before the invention of currency, tribes and early civilizations would often keep a record of who traded what with who. Dating as far back as 5,000 BC in Mesopotamia, people used clay tablets as primitive “ledgers” to record transactions of crops and animals.

An example of an ancient clay “ledger” used in Mesopotamia. Saying something along the lines of, “Bob gave Phil a goat and Phil gave Bob 6 chickens.” or, “Tom gave Doug 3 clay pots of wheat so Doug owes Tom 2 clay pots of apples next harvest.”, something like that. This clay-tablet ledger is like a blockchain’s great ancestor.

Ledgers such as these would also be used to keep track of debts owed, so it was important that they were kept in a safe place to avoid tampering or damage. In ancient Mesopotamia; ledgers, along with other commodities, were safe-kept inside of guarded temples and palaces, the seeds of the first banks.

Later, banks took over the role of calculating and maintaining ledgers. They kept track of transactions, as well as debts owed, and kept these records (ledgers) safe, except at this point people were using currency and no longer bartering with crops, animals and other goods.

A Bank of England ledger from 1847.

For centuries, people have trusted banks to keep and maintain ledgers (records); people agree with the information in a bank’s ledgers and trust that that information is safe from tampering or damage.

Ledgers (Records) in Modern Banking

Because everyone agrees with the information in a bank’s records, banks are often used as an intermediary for transactions between two parties. When you swipe your debit card at the grocery store and the POS terminal states that the transaction has gone through, the grocery store trusts that you’ve paid. The grocery store (the merchant) trusts your bank’s records.

When a POS terminal states that your payment is approved, the terminal is trusting that your bank’s records are accurate. In turn, the merchant is also trusting your bank’s records.

Both parties involved in a transaction trust that the records of the bank are accurate. If the bank says the transfer has successfully been completed, then the buyer and the seller can both trust and agree that the money has in fact gone through.

A Ledger Requires Trust and Agreement

To come closer to understanding the heart of cryptocurrency, it’s important to note that a ledger requires trust and agreement in order to work. If nobody trusts or agrees with a ledger, then what’s written that you “own” in that ledger isn’t actually yours.

When you receive a bank statement, it’s taken from the bank’s ledger. If that bank statement says that you own one million dollars, then everyone trusts and agrees that you own one million dollars.

A bank statement is essentially a snapshot of a section of a bank’s ledger.

However, if I went and typed up my own ledger on Excell and wrote in that I own one million dollars, nobody will trust it or agree with it. People trust and agree with a bank’s ledger, they don’t trust or agree with the ledger I personally created.

The Pros & Cons of Using Banks and Their Ledgers

Banks add a level of trust and security to transactions; this is why banks have been around for hundreds of years. The downside to this is that banks (and their governments) have the power to monitor and control people’s money, as well as put their hands in people’s pockets with fees, especially when transferring money internationally and/or converting fiat currencies.

A massive magnet pulls money from people's wallets and pockets.
Banks are businesses; they are always going to try to make as much profit off of their customers as possible.

So we have this issue. For centuries, we’ve been trusting banks to keep records (ledgers) of who owns and owes what. But at the same time, we’ve been sacrificing some of our privacy, independence and percentages of our wealth (to fees).

With banks, your spending habits are monitored. Banks are able to completely construct an image of your financial life.

But what if there were a better way? What if there were some form of modern technology that could help us get the best of both worlds? What if we could have security/trust while at the same time also have financial privacy/autonomy?

We would need a secure ledger that everyone could trust and agree on, and that wasn’t able to be controlled, interfered with or manipulated by any person or institution.

Enter blockchain technology.

Enter blockchain technology.

How Blockchains Are Different from Banks

Blockchains Are Distributed and Publicly Accessible

A blockchain is a digital ledger, but it is a digital ledger that everybody has access to, yet nobody can tamper with or control.

Throughout, ancient and modern human history, bank records (ledgers) have traditionally been kept in a secure central location held by one group or institution. From being guarded in temples/palaces to being locked tightly behind steel bank doors to being stored in cybersecurity-boosted databases in banks’ mainframes, records historically have been centralized to the extent where one institution has possession and control of them. People have trusted banks to maintain and update records, but they’ve given this trust without being able to actually access or see the banks’ entire records themselves.

Here’s where cryptocurrencies differ from banks.

For almost every major cryptocurrency, the entire ledger (the entire blockchain) is out in the open for all to see. You don’t have to rely on trusting somebody’s word about whether or not they sent or received a transaction, you can just easily take a look at the ledger yourself.

With the blockchains of almost every major cryptocurrency, anyone can take a look at the entire ledger at any time; they are completely public. Seriously, you can see every single Bitcoin transaction that has ever happened since the beginning of Bitcoin in 2009 right here; you just need to search for the block number.

Anybody in the world can see every single Bitcoin transaction ever made, from large to small. Bitcoin’s ledger (blockchain) is publicly available for all to see.

Blockchains Are Anonymous

When observing the Bitcoin blockchain (see image and/or link above), you’ll notice that you don’t see the names, email addresses or any information whatsoever about the senders and receivers. You can only see their wallet addresses (a series of random letters and numbers); no other information is tied to the people involved in a Bitcoin transaction.

It is almost impossible to determine someone’s identity based on these strings of random letters and numbers, which is where cryptocurrency gets its reputation of being anonymous.

This is the paradox of Bitcoin, everybody can see all of the transactions but nobody can see who is doing the transactions.

When people make transactions on a blockchain, they can do it anonymously. It’s almost impossible to attach somebody’s wallet address to their true identity.

Blockchains Are Decentralized

For almost every major cryptocurrency, nobody owns or controls the ledger (the blockchain). The blockchain is available for anyone in the world to see, no matter who or where they are. There is no administrator, boss or CEO; it is a completely decentralized ledger. No person, group, company, bank, government, corporation or any other entity can ever take control of the blockchain of any major cryptocurrency.

Having a decentralized public ledger like this, plus the inherent security of a blockchain (more on that shortly), eliminates the need for an institution (a bank) to be the middleman. Therefore, you aren’t forced to allow somebody to stick their noses or fingers into any of your transactions.

Additionally, having a transparent, distributed ledger (blockchain) means that cryptocurrency is open to everybody on the planet. An entire 31% of adults in the world do not have access to a bank account, but if they have just an internet connection then they can access cryptocurrency. There are no requirements to “join” cryptocurrency. You don’t need to pass any checks; nobody needs to give you permission. It is completely nonexclusive.

31% of the world is unbanked, but with only an internet connection, anybody can buy or sell cryptocurrency.

Cutting banks out of the equation by using blockchain technology can help you keep your finances, purchases and sales unmonitored, unlevied and un-interfered with, as well as remove barriers that banks may place in front of you. But then aren’t you sacrificing security? Can you trust blockchain technology as much as you can trust a bank? Let’s take a look at that.

What Makes a Blockchain Secure?

Blockchain Blocks Require Majority Agreement to Be Valid

What makes a blockchain so secure is the fact that it is distributed; there are multiple “live versions” of each blockchain. At any one time, the Bitcoin blockchain has tens of thousands of complete live versions of its entire blockchain (these are called nodes) in the network. If somebody is able to tamper with even one block on his live version of the blockchain, then everyone else will instantly see that it doesn’t match up with the other live versions. Let’s look at it like this:

There are 100,000 people in a room each holding an identical white image (a live version of the blockchain) on a piece of paper. One person (a hacker) tries to tamper with his image. Because the image has been tampered with, an exploding dye pack goes off and completely covers his image in permanent red dye.

If any block on a live version of a blockchain is tampered with, it is immediately obvious. It’s comparable to an exploding dye pack coating currency bills in red dye, labeling them as clearly stolen.

Every 10 minutes, everyone posts their images next to each other on a big wall. It is immediately apparent that the image covered in red dye has been tampered with; it instantly stands out against the 99,999 white images. It’s 99,999 people’s word against 1 person’s word. The incongruent image is disregarded and ignored; the hacker’s version of the blockchain is identified as invalid and false. Everybody moves on to the next room in the hallway and takes their identical white images with them, but the red-dye-covered image is left behind.

As long as more than 50% of the live blockchain versions (nodes) agree on something, the versions that are different are identified as false and ignored. This all happens very quickly.

If somebody tampers with his live version of the blockchain, it is immediately obvious that it is different from the majority of the other blockchain live versions. The tampered-with version of the blockchain is then ignored and left behind.

So what exactly is this metaphorical dye pack? What makes it so obvious that a block has been even slightly tampered with? Let’s talk about that.

Blockchain Blocks Are Essentially Immutable

Let’s use the Bitcoin blockchain again as an example.

To recap, roughly every 10 minutes a new block is created on the Bitcoin blockchain. This block is filled with data of recent Bitcoin transactions. The data in the block shows a list of wallet addresses that have sent Bitcoin to other wallet addresses, as well as the amount of Bitcoin sent. Again, you can see all of this happening live here.

Each Bitcoin block contains anywhere from 500-3,000 transactions, such as the one seen in this image.

Remember, in order to create a new block on the end of the blockchain, an extremely complex math equation must be solved. The process of solving this equation is called “mining”. “Mining” requires a massive amount of computing power, and is why Bitcoin consumes so much energy.

Once the block has been mined and the data is written inside (about 10 minutes per block), the block is closed and becomes added to the end of the blockchain. At that point, it is almost impossible to edit, modify or remove. It’s like writing in wet cement, once the cement hardens (the block closes), the information written will be there forever, and is extremely difficult to be changed. The block is basically immutable.

Once a block on the blockchain is closed, the data inside is “set in stone”. The contents are almost impossible to be changed.

Furthermore, every time a block closes it is given a complex identifying number called a “hash“. The hash of a block is like a fingerprint, completely unique to that block. If anyone changes even one number inside of the block, then the hash of that block will completely change (the dye pack bursts and soaks the block) and it will be immediately obvious to everyone else that that block has tampered with; everyone else on the network will then ignore that person’s live version of the blockchain and move on without them.

Every Block Added Makes a Blockchain Stronger

On top of that, each freshly added block in a blockchain will also contain the hash of the previous block.

Each block “knows” the hash (fingerprint) of the previous block. Hashes on the bitcoin blockchain are actually 64 characters long.

This means that if a block were to be tampered with in any way, then every subsequent block would also have its hash changed; every subsequent block would also be covered in red dye from the metaphorical exploding dye pack. Bitcoin currently has over 700,000 blocks. If somebody wanted to tamper with the data in the 100,000th block, the hashes of all of the blocks from block 100,000 to block 700,000 would also be changed. A hacker would essentially need to individually re-mine (remember how difficult that is for even just one block) every block from 100,000-700,000 to have any hope of his tampered block being accepted as legitimate.

As we’ve learned, mining requires an obnoxious amount of energy, and each block takes around 10 minutes to mine (on Bitcoin’s blockchain). So to attempt to re-mine an entire blockchain would require a ridiculous amount of computing power and time; the amount of time, money and energy required to do this would be basically insurmountable. Successfully tampering with one block alone is nearly impossible, tampering with hundreds of thousands is exponentially, ludicrously unlikely.

As we can see, blockchain technology has been designed in a way to be extremely secure and immutable by nature. So is there a weakness or a vulnerability?

Is It Possible to Hack a Blockchain?

Theoretically, yes. Here’s how.

First of all, let’s remember:

There Is No Central Location To Hack

As we’ve learned, almost every blockchain is decentralized, meaning somebody can’t just do an epic Mission Impossible break-in, hack one central mega server and then steal all of the cryptocurrency off of the blockchain. There is no “Bitcoin Headquarters” to break into; there is no one central system to hack.

Blockchains are decentralized, there is no one central computer that you can hack to gain access to everything.

As we’ve discussed, a blockchain doesn’t have one central location; a blockchain is distributed throughout many different live versions (“nodes”) of that blockchain.

So, to tamper with a blockchain, somebody would need to control of over 50% of the live versions of that blockchain. Basically, they would need to take control of over 50% of the computing power of that blockchain in the world; this concept is known as a “51% Attack“.

A 51% Attack

If one individual or organization were able to gain control of 51% of the computing power of a blockchain, then they would be able to double-spend their coins. They could spend their coins, then on 51% of the live versions of the blockchain, they could delete that transaction out of the block currently being created, and then spend the coins again.

While tampering with the current block, the dye pack will have exploded onto that block (the hash would be altered), but that block would also be covered in red dye on 51% of the live versions of the blockchain. The red-dyed-covered versions would be seen as legitimate (because they are now the majority) and would carry on creating the chain (temporarily).

Theoretically, a 51% Attack is possible. It has actually happened, but on the blockchains of small low-value cryptocurrencies that didn’t have much computing power dedicated to them. To mount a successful 51% Attack on a larger cryptocurrency such as Bitcoin would require an astronomical amount of computing power costing billions or tens of billions of dollars.

There are estimated to be over a million Bitcoin miners in the world today; somebody would need to generate the computing power of over a million other miners to be able to temporarily tamper with the creation of the current Bitcoin block. A 51% Attack on Bitcoin would be outlandishly expensive.

Mounting a successful 51% Attack on a major blockchain would require an ungodly amount of energy.

Furthermore, even if somebody were to somehow gain 51% of the computing power of that blockchain, they would not be able to alter any of the hundreds of thousands of blocks already created on that blockchain. They would not be able to steal coins from people’s wallets. They would not be able to create new coins out of thin air.

What they could do is tamper with the new blocks that are created during the duration of them holding 51% of the computing power. They could change the page of the ledger currently being written, but not the hundreds of thousands of previous pages.

Cryptocurrency Exchanges Occasionally Get Hacked

Every now and then, you’ll hear about a cryptocurrency exchange getting hacked. This is why you should never keep a significant amount of coins on a cryptocurrency exchange for any longer than necessary.

However, it’s important to make the distinction here that it’s only the exchange’s cybersecurity that gets hacked; the blockchains themselves are untouched. It’s a fault of the exchange, not a fault of the blockchain.

Other Uses of Blockchain Technology

Because blockchain technology is by nature secure, anonymous, immutable and decentralized, it’s being eyed for other applications beyond only cryptocurrency.

Some applications of blockchain technology that we may see in the future include:

  • Using a blockchain to cast votes in an election.
  • Using a blockchain to keep track of medical data.
  • Using a blockchain to keep track of the supply chain of food or other products.
  • Using a blockchain to keep track of the speedometer of vehicles.
  • Using a blockchain to store authentic pieces of digital art (NFTs).
  • Using a blockchain to store personal identification information.
  • Using a blockchain to store important deeds, such as for land or a home.

Blockchain technology has already made quite an impact in the 13 years since it was first implemented; it’s easy to imagine that it will continue to have significant effects on society in the near and far future.

Although blockchain technology is a complex concept, it would be advantageous to understand this technology, as there’s a pretty good chance that we’ll be seeing a lot more of it in the world.

James | MosaicWriting.com

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