New to the world of blockchain and cryptocurrency? Not to worry! While it might seem complicated, you only need 15 minutes to get a decent grasp on the field.
If you’re a Quarry user, you’re already on the right track! Let’s get started.
What is a blockchain?
Simply put, a blockchain is a series (“chain”) of informational containers (“blocks”).
While this technology was described as far back as the 90s, it was mostly ignored until Satoshi Nakamoto used it to create Bitcoin in 2009. As it is used in Bitcoin, a blockchain functions as a distributed ledger that is open to anybody. When data has been added to a blockchain, it becomes very, very difficult to change it.
How does that work? Let’s look at a block.
Each block contains some data, the hash of the block, and the hash of the previous block. The data stored inside a block depends on the type of blockchain. The Bitcoin blockchain, for example, stores data about transactions, including a sending address, receiving address, and the amount of coins sent.
A block also has a hash, which is a kind of digital fingerprint. You can use a hash to identify a block and all of its contents, and it is always unique to that block. When a block is created, its hash is created, meaning that changing something inside the block will also cause the hash (fingerprint) to change.
What this means is that hashes are useful for detecting changes to blocks. Basically, if the hash is different than expected, we know that it is no longer the same block.
The third element in each block is the hash of the previous block. This effectively creates a chain of blocks — a blockchain — with each block pointing to a previous block.
This means that changing anything, on any block, makes all the following blocks suddenly invalid, since changing the data inside a block changes the hash, breaking the chain link with the next block.
Hypothetically, a computer could make a change to a block, then look “ahead” on the blockchain and calculate the hashes of all the following blocks, “tricking” the blockchain into believing the change. To mitigate against this, blockchains use a number of methods to effectively “slow down” the calculations of hashes. The most popular method (and the one used by Bitcoin) is called proof-of-work.
Proof-of-work is a mechanism that slows down the creation of new blocks. In the case of Bitcoin, it takes about 10 minutes to calculate the required proof-of-work and add a new block to the chain. This makes it very, very difficult to tamper with a block, because doing so requires that you (slowly) recalculate the proof-of-work for all the following blocks.
Already, this makes for a very secure method of storing data, but blockchains have one more method of security, and it is the most powerful of all.
Blockchains are distributed and decentralized.
Instead of keeping all of this data in one place, blockchains operate on peer-to-peer networks, allowing anyone to join. When someone joins the network, they get a full copy of the blockchain (called a “node”). When someone creates a new block, it is sent to every node on the network to ensure that it hasn’t been tampered with. If everything checks out, each node is updated to include the new block. The nodes in the network have to have a consensus, meaning that they have to agree about which blocks are valid and which aren’t. Blocks that are tampered with are going to be rejected by the network unless 51% of nodes agree.
Hypothetically, to change records on a blockchain, someone would need to:
- individually tamper with all the blocks on the chain,
- redo the proof-of-work for each individual block, and
- have control of 51% of the peer-to-peer network.
This is almost impossible to do, and it becomes more difficult as more people adopt the technology.
Blockchains are also constantly evolving. For example, some blockchains, such as the Ethereum blockchain, have developed smart contracts, which are a kind of simple program that is just as difficult to change as the data described above.
So, now you know what a blockchain is, how it has been designed for security, and what problems it solves.
What is a cryptocurrency?
A cryptocurrency is a digital form of money. In general, cryptocurrency can be purchased with fiat currency (“fiat” here meaning government-owned and distributed, such as US Dollars) and traded for other forms of cryptocurrency or fiat currency.
Cryptocurrencies are a blockchain technology, solving many of the problems of traditional monetary exchanges. They are secure, transferable, irreversible, anonymous, fast, global, debt-free, and permissionless.
Basically, cryptocurrencies are designed to be what traditional fiat currencies are supposed to be.
The most popular cryptocurrencies include Bitcoin and Ether, as well as hundreds of both well-known and obscure cryptocurrencies such as Dogecoin and Ripple.
Finally, many cryptocurrencies are built directly on the Ethereum blockchain, with the most popular standard being ERC20 tokens.
What is an ERC20 token?
An ERC20 token is a special kind of cryptocurrency that is built on the Ethereum blockchain. Because Ethereum is built to allow for smart contracts, it functions as an environment where whole programs can be created and run. Because of this, many companies now are choosing to create their usage tokens in this way.
A token can be thought of like a movie ticket or concert pass. In general, you don’t just hand your money to a concert venue as you enter the building, but instead purchase a ticket ahead of time and use that on the day you actually want to attend the concert.
ERC20 tokens function much the same way. A company announces that their product or service is redeemable for tokens, which are available for sale in cash, and just like a traditional concert or movie ticket, these tokens can be given away or sold. This means that if you believe that a company’s services are going to become more valuable in the future, you might stock up on the tokens, hoping to sell them later. Alternatively, if you need access to a service now (for example, you want to take your date to a concert this weekend), you might be able to find the tokens (in this example, tickets) more cheaply on an open exchange.
What is an Airdrop?
An airdrop is a free way to get in on the ground floor with new ERC20 tokens.
Sometimes, when a company decides to create a new token, they choose to give away “free samples” to the public in exchange for getting involved with their push on social media. This could mean following them on Twitter or Facebook, posting in their Telegram group, or signing up for their email list. A few weeks or months later, the tokens are distributed to everyone who got involved as a way of saying “thank you.”
Airdrops are completely legitimate, run by the companies that create the tokens in the first place. They’re a win-win for both the businesses and the users. As with any usage token, they can be saved up and used later, or traded on an open market.
If you’d like to know more, check out our full article: All About Airdrops.
What is a Dapp?
Just as companies are able to create their own tokens atop the Ethereum blockchain, they are also able to build entire programs, called Decentralized Apps (Dapps), in much the same way.
Dapps function much the same as traditional apps on your mobile device or on the web (Facebook, for example, is one popular mobile app), except that they are decentralized. What this means is that they are not directly owned by any one individual, but by all of the people who use the blockchain. There is no central location where all the data is stored on servers, no single point of failure, no place for hackers to attack.
But honestly, most non-technical people don’t need to care about any of this.
Put simply, Dapps are the future of online applications, and right now they serve as an excellent proof of what can be built on a distributed blockchain.
Why should I care?
Blockchain will do to the financial world what the internet did to the media world. If you consider the difference between how we access media today (YouTube, Netflix, Spotify, online news outlets, etc.) and how we accessed it 20 years ago (cable, Blockbuster, cassette tapes, etc.), it’s easy to see just how much better things are now because of easier and faster access.
Blockchain is the internet of money.
It is already changing the way that people send and receive transfers, increasing financial privacy, solving traditional banking problems (such as double-spending), and enabling the common person to have much more direct control of their finances.
The purpose of cryptocurrencies isn’t to get rich on the next boom, although it is possible. The purpose is to have greater access to and control of financial tools. And, if you aren’t interested in money, blockchain also allows for complex decentralized applications, which are more secure and less prone to misuse than traditional centralized applications (such as Facebook).
Simply, you should care because blockchain is the future.