Bitcoin, Ethereum and more: how blockchains and cryptocurrencies work

What are crypto and blockchain, and why should you care

In our day to day lives, we may have encountered friends, family members or coworkers who have mentioned, bought or even sold cryptocurrencies, and many times, once one asks what crypto is, it ears a curse that forbids it to understand it, all jokes aside, bitcoin is a cryptocurrency, and a cryptocurrency is a monetary system that is encrypted (thus the “crypto”-”currency”), and by encrypted we mean that it stores a ledger, with all the past payments listed over time, each payment in the form of a block, that is then encrypted into tremendously complex functions that have special capabilities (to be discussed later). Now, it may seem exciting to analyse such a complex system, find and describe each of its vulnerabilities and advantages, yet it also is important to consider why. If you are a human, chances are, you value a political system that uses fictional currencies to trade goods and services, and you may also more fundamentally value these such goods and services themselves, so you likely value your money’s future development, which is increasingly being influenced by cryptocurrencies and other blockchain systems.

How blockchains are monetized: blocks

As developed in the last section, bitcoin and other cryptocurrencies are all stored as fictional numbers on computers, but more specifically, crypto is really just a big ledger of blocks, where each block contains information about 1 transaction, this information is stored as either: a peer to peer transaction (Alice pays Bob 10 btc) or a peer to the self transaction (bob buys 10 BTC at 15$ each). The total value of all bitcoins is all the money put in through peer to self transactions minus all the money put out through peer to self transactions. The value of 1 bitcoin is the total value of all bitcoins divided by the number of bitcoins owned in total. The idea by which cryptocurrencies rely is the same as the one stocks rely on, where no more cryptos are issued, and the price changes according to a rise/fall open market (just like stocks). The only way for more cryptocurrencies to appear is through mining.

Proof of work, mining and decentralized infrastructures

After seeing that bitcoin is a big ledger of transactions, you might be asking yourself where this list is stored. The truth is: anywhere. Anyone can keep their own copy of the ledger for themselves, and whenever someone makes a transaction, they broadcast it to all the people holding a copy of the ledger. There yet arises another problem: how can you know someone is not broadcasting made up messages just to steal free money? For that, we will have to explore deeper the hash or cryptographic functions. A hash or cryptographic function is a very complex function that takes in text and returns an encrypted version of it, but what makes them special, is that it is really computationally heavy to find a function that takes in the encrypted version and returns the text. With that property, we can introduce the concept of mining.

Mining is trying to find a text, that when combined with a block of the ledger and inserted into a CHF (cryptographic hash function) returns for example any numbers starting with an x amount of zeros, since most CHFs return binary text, for a standard CHF like sha256 (returns 256 zeros and ones), we can calculate the probability of a miner to have to try random numbers until it returns a number following the specific requirement (1 / 2^number of zeros required), thus, we can trust a new block that is broadcasted if it has been mined and comes with the right text to meet the requirement. The blockchain can be even safer by forcing every block to contain the CHF encryption of the last block, this link forces every block to be right, as it would be required a lot of computational resources to mine all of the blocks again. This concept of proving that you put computational work into the block is called proof of work.

The power of blockchains: decentralize everything

Now that you understand that a blockchain fundamentally consists of mined blocks of information, you might wonder why someone would spend so much computer resource into mining, well, bitcoin, ethereum and other popular blockchains all use the concept that once someone mines a bock, they are rewarded with a fraction of btc or eth. This process of requiring computational power to produce coins and have a secure way for transactions to happen without the need for a middle person (no need to be sexist) is absolutely genius. It democratises power and monetises any asset. For example, say you wanted to make a marketplace for producing animations, you might make a coin that can be bought by anyone wanting someone to make the animations, and they could set a block with all the animation requirements and the respective amount of the coin they are offering to receive their animations, and anyone could mine the block by producing an animation that fits all requirements, and then rewrite the block with the animation inside, and then receive a code that can be exchanged for the currency. Without a middle person, or any fees. Now that you understand the power of blockchains to monetize and democratize any asset, we are prepared to analyse the implications of current blockchains on the future of money, power and earth.

The wide market adoption: who, when, where, why

Blockchains can be democratized and hold elections, arranged in any preferred voting system, and can thus accommodate a population without the need for a government, and more specifically, cryptocurrencies can now provide assets that interest people to invest their money on. The two biggest winners at the crypto game obviously are BTC and ETH, which both have been gaining wide market adoption and account for more than a trillion dollars of cash being listed on them every day. With all these great blockchain opportunities that allow for unimaginable amounts of possibility, companies, governments and individuals easy are buying more and more crypto as the days go by, ark-capital researchers estimate that by 2050 1 bitcoin will be worth anywhere from 5m - 50m. Theu reason that as the euro, pound and us dollar have all been suffering from major inflation, bitcoin becomes more and more reasonable of an investment. The full article is listed in the next section.

Sources https://ark-invest.com/strategy/cryptocurrency/