Have you ever tried explaining cryptocurrency to someone who has never heard of it before? Skip to a couple of days ago, when I was surrounded by uncles, aunts and my mom, and they were all asking me about Bitcoin. The only way to explain to them how this cryptocurrency really works is by letting them know the basics, such as how the transactions work, where are they stored, and why this is a way of securing transactions.
Explaining this type of technology to most people above 50 years old can be challenging, because it is a completely different generation - but it is absolutely rewarding when you are able to make them grasp some knowledge about it. And, before you know it, those same people will be asking you how to trade crypto, and even which currency will be going up in the next week.
I asked myself if there was an explanation such as the one that I gave to my family; a basic, yet full knowledge base to show them – but I couldn’t one. So, I’m making it myself, and my goal here will be to provide the answers to how this new technology works through easy-to-understand vocabulary.
PART 1 of 3: The Blockchain and The Bitcoin Network
First, let’s focus on the way Bitcoin accounts work: Bitcoin accounts are simple 34 digits strings that can include characters or numbers. These strings are tied up to a balance, which can also be a zero value. So here’s an appeal of Bitcoin - you can open up an account with absolutely zero dollars.
To have access to the funds in the account, you have to know the password, which will be 64 characters in the range 0-9 or A-F.
Account balances change when a transaction is sent or received, and these transactions have to contain a positive (non-zero) amount of Bitcoin. It is possible to get/buy/spend “parts” of a whole Bitcoin, this way any dollar value can be transacted in the Bitcoin network.
A tricky part of Bitcoin’s balances is that a balance is not represented by just one number - it is represented by several numbers representing coins that have not been spent, which the address has received in the past.
So, if you would peek into an account that holds a balance of 3 BTC you would probably not simply see a 3. You would more than likely see three distinct amounts, such as: 0.01, 0.2 and 2.79 BTC; which all adds up to 3 BTC.
If the owner of this account decides to spend a certain amount of coins, let’s say 2.7 BTC, then the electronic wallet would have to choose the closest amount in the account’s pool of unspent coins to the value that the user is about to send (in this case it would pick the 2.79). The wallet would then create the transaction with this selected amount of coins.
Sometimes, as in the case I provided, the selected amount is not exactly the amount that the user wants to send. So, the electronic wallet will create one transaction with the intended amount of coins to send (2.7 BTC), and the remaining coins will go back to the senders account(.09 BTC). Meaning, the Final account balance for this user would be 0.01, 0.02 and 0.09 BTC.
Now that we understand how these accounts work, we have to know how transactions are sent from one place to another, and how this record of transactions and accounts is kept.
Transactions are firstly sent from the electronic wallets to a “public” pool of transactions. Several validators are picking transactions from this pool and including them in their blocks of transactions. Of course, these validators do not do this for free - the one validator that makes sure that every account has the coins that it is spending, which also calculates a mathematical puzzle the fastest, collects some fees and is rewarded by the network. Not all transactions will be picked for this block, and the transactions that were not picked will have to wait at least 10 more minutes for the next round of “picking and validation.”
This validated block of transactions makes its way through the Bitcoin network, going from computer to computer. Actually, it goes to all 12028 computers of the network. These computers don’t just store the transactions in the block, but they also update their balances of all of the accounts in the Bitcoin Network. They validate the received block, so the 12028 computers that are spread around the world hold all of the records of all valid past transactions and balances in the blocks.
This record is public and anyone can see the balances of all accounts, as well as the transactions that have been validated. (https://www.blockchain.com/en/explorer)
That is the basic level of understanding needed to understand the Bitcoin network. But what is really interesting about it is the technology that is underneath it – Blockchain. This tech is really correlated to the mathematical puzzle that I mentioned before (paragraph #6).
So, as the transactions are stored in a block, all the blocks of transactions are connected (that is where the name “blockchain” comes from). This connection is what secures the transactions from being altered or corrupted. This is what makes this technology secure.
The connection between blocks is simple - it is a 64 characters string (that we call a hash) that is formed by combining all transactions in the current block + the 64 characters string of the past block + a “mystery number.”
But to get this 64 character string is not as easy as anyone would think. To get it, the validators use a secure algorithm/technique where they input the data mentioned in the last paragraph. This algorithm always outputs a different 64 character string. After receiving this string, the validators have to make sure this string starts with a certain amount of zeroes, and if it doesn’t, they will have to increase the mystery number.
This is the mathematical puzzle that validators have to solve to get the reward: guess the “mystery number” that is in conjunction with the current transactions in the block and the hash of the other block. If you input it into the secure algorithm, it outputs a 64 character string with certain amount of zeroes (right now this string has to have 17 zeroes, but the Bitcoin network increases this requirement every once in a while).
Solving this mathematical puzzle is extremely hard, because it takes a lot of computing power, a lot of energy and it costs a lot. To be able to attack the network, an attacker would have to have 51% of the validation/computing power, which would cost millions if not billions of dollars, and it most likely would not be profitable. If the attacker held this amount of validating power, it would be able to spend several times the same coins and validate these transactions for them to be a part of “The Bitcoin Blockchain.” If this ever happened, the public definitely realize it, the attacker would hold a bunch of useless coins, and the “good validators” would probably be able to recover the control of the network after the first malicious transactions.
So, back to my family. After explaining to them the way that transactions are stored in The Bitcoin Network (“The Blockchain way”), they started having questions about the speed of the transactions. I told them that right now that is an issue, but that there are several people designing solutions which will be implemented soon into The Bitcoin Network. Also, I mentioned to them that there are already other projects that solved the “speed” problem of the Bitcoin transactions, and that is where we will start in the next part of this “The Blockchain, The Block Lattice and The Tangle for dummies” series.
Any comments, corrections and suggestions are welcomed!