Blockchain, Ethereum, and Bitcoin can be confusing. To be honest, most people understand some aspects of it, but not others. For example, there's "mining" and "cryptocurrencies" on the economics side, but "blockchain" and "decentralized" and a whole bunch of other words and terms on the tech side.
We're going to look through 10 simple questions and and give their answers, and by the end you should know how Blockchain, Ethereum, and Bitcoin work.
1. What is Blockchain?
It's just a chain of blocks. Literally, a line of "blocks".
2. What's a Block?
A block has some data inside of it. There are four things inside of a block:
1. A reference to the previous block in the chain.
2. The "proof of work".
3. The timestamp of the block.
4. The Merkle tree root for all of the transactions that are included in the block.
3. What's "Proof Of Work"?
The Proof of Work is a specific consensus algorithm. "Proof of work" is used in bitcoin mining.
Basically, it involves solving a puzzle (the computers do it) that's easy to check, but hard to solve. For example, it's easy to check if a key works on a lock, but hard to create a key that works on a lock.
Besides Proof of Work, "Proof of Stake", "Proof of Elapsed Time", and "Proof of Authority" are also some popular consensus algorithms.
4. What's a Consensus Algorithm?
Consensus means that everyone on the system (network) agrees that the data in the ledger is correct.
Imagine that we were in doing a group project in school in a shared Google Doc, and maybe we have a title page with everyone's names. If everyone prints a copy of the paper the day the project is due, but someone's paper has their name on top and in bold, everyone else would immediately realize they changed it since it's different from theirs (and everyone else's).
Consensus is sort of like that. (But because there are a lot more people on the blockchain, it's more fool-proof.
A consensus algorithm is just the computer version of checking that everyone's distributed ledger is correct, so that one person doesn't change the data.
5. What is a Distributed Ledger?
It's a copy of the blockchain. It exists on all participant's computers.
If the blockchain gets updated, and the consensus algorithm agrees "yeah this data looks right", then everyone else's copy of the blockchain gets updated.
Distributed ledgers mean everyone gets a copy of the blockchain, which is why blockchains are "decentralized".
6. What does "Decentralized" mean?
Decentralized means that the data in the blockchain is stored on a lot of people's computers, not just one company/persons. Meaning that the data is very hard (basically impossible) to edit.
7. So what's Bitcoin?
Bitcoin is a cryptocurrency that uses a blockchain. Miners "mine" blocks to generate coins.
8. What's a cryptocurrency?
It's an online (virtual) currency. It has value because people place decide it has value. (Sort of like jewelry. An emerald looks nice, and it costs some money to mine and refine, but it's actual value is because people like it since it looks pretty. Bitcoin is sort of the same. (Which is still valid.))
This is opposed to government backed currency like $US dollars of the Euro, where there's a real authority and a system in place for why the currency has value.
9. What about Ethereum?
Ethereum is a system that uses blockchain, mostly to deploy apps and use smart contracts that are backed with blockchain technologies. It's a blockchain, and people who do the computing power to mine blocks are awarded the cryptocurrency "ether".
10. What are Smart Contracts?
It's basically a set of rules and instructions that exist as software that automatically get fulfilled as conditions are met.
Which is basically like any other program. The reason smart contracts are good though is that they get pushed onto the blockchain, meaning they do get invoked and no one can tamper with them or change their mind or break the rules.
We went over blockchains and cryptocurrencies. The technology itself is pretty complicated if you want to know exactly how it works, but to get a general understanding is pretty simple.
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