There are two key technologies which are the foundation to most cryptocurrencies; they are Cryptography and Blockchain. While today’s cryptography concepts are derived from ancient times, Blockchain is a relatively new database technology. The two complement each other in a unique way that enables the cryptocurrency network to be simultaneously transparent, secure, and dependent solely on the world wide web, and no other entity. We will focus mostly on Bitcoin’s Blockchain here, and address Cryptography more deeply in a separate post.

Blockchain is a method for storing data in a secure yet transparent way, and was invented in the 1990’s. The inventor’s original objective was to create a database that could have irrefutable, and “immutable” timestamping of the data that was placed inside the database. This meant that any document placed in this system was indelibly recorded as existing as of that date and time. Despite being able to view it, no single biased company or person could change the document or the timestamp, making it very useful for a wide variety of purposes, and users.

Satoshi Nakomoto, the anonymous person credited with the creation of Bitcoin, leveraged blockchain and cryptographic technology to “immutably” record not only the timestamp of transactions, but also the owner addresses and the quantity of coins held by them. This made it a “store-of-value” digital asset. 

Putting the use of cryptography aside for the moment, let’s focus on the blockchain mechanics. If you can visualize it, you might think of a “block” as a box that gets filled up by transactions until it’s full. Each full block is then “chained” to the preceding block using cryptographic computations based on the contents of each block. The contents are coin transactions, which are primarily the movement of full, or partial coins between buyers and sellers, and the transactions can number between 1,700 to 2,000 per block. Miners compete for the task of closing the blocks once they’re full, and they do so because it earns them about six new bitcoins for each block they close. Miners are people who have purchased the required computer equipment and run the programs all day and all night, hoping to be the first to close the next block that comes along. Anyone can be a miner, but the investment in time, money, and expertise is not small. 

In fact, miners have the most important role in sustaining Bitcoin, or any cryptocurrency. For Bitcoin, there are an estimated one million miners world-wide. While they compete with each other to close a block, they are also validating the transactions that would be included in that block, checking to make sure that no coins have already been spent by the same owner more than once. Although the work they perform is automated, it requires highly sophisticated computer power and a lot of electricity to run the computations necessary to close a block and start a new one. For the sake of security and permanence, it was designed purposely difficult to do, and this is due to cryptographic algorithms that convert the block of transactions into 64 alphanumeric characters, called hash numbers. As more blocks are mined the computation gets progressively harder because of the cumulative effect of all the hash numbers. 

The end result of all of this effort is the collection of over 700k blocks of data so far. All the blocks reside on all of the miner nodes throughout the world, so everyone has a copy of the entire collection of transactions, and anyone connected to the network through the internet can view the data. While the transactions within these blocks are protected from being changed, they are viewable by anyone, or any system that knows what to look for.  A wallet, for example, does a very good job at summarizing all of the relevant transactions that pertain to its holder. Since the blockchain is a public ledger of transactions, all of the transactions that belong to a specific owner can be summarized, yielding a balance of coins owned.

There are a few fundamental elements of a cryptocoin that make it critically different from fiat money (like the US dollar), or other traditional liquid assets. They are:

• It’s Decentralized – There is no central authority overseeing the coin, like the government does for the dollar. In crypto context, it is independent which means it exists on its own without any centralized authority watching over it, like a company, a government, or a university. The coin’s network lives on the internet and runs autonomously, almost virally, across the millions of nodes operating around the globe. Its existence is dependent on the pervasiveness of the internet and its world-wide participation of millions of users.
• It’s Electrically derived – For this we can thank Ben Franklin! Because of the above condition, without electricity, access to your coins, or the mechanisms that drive the validation of transactions, or the transactions themselves would be hard to exist. This is considered a remote risk on a worldwide scale, but conceptually it’s possible that a power outage would impede your access. Relatively speaking, a worldwide power outage would impede access to most of our traditional money too!
  
  
• It’s Highly Secure, but password complex – Cryptography and the blockchain database structure make the system very highly secure, but there are differences from the traditional user password methods that increase the risk of lost, forgotten, or stolen passwords. This condition calls for a more diligent approach to managing passwords that we’re not used to. Remember, since there’s no familiar backstop, or central authority to assist on password recovery, it requires much more rigor in personal management of passwords. We address best practices for password management in a separate post.
  
  
• The data is Highly Transparent – The coin’s blockchain database is a collection of data that is transparent to anyone who is interested, although owner identity is pseudonymous, meaning somewhat anonymous, or hard to identify. A public address associated with you is accessible, but it’s a series of computer generated numbers and letters. Your private address links to your public addresses on the network, so it is extremely important to protect your private address, and wallets go to great lengths to keep this information safe by assigning rather onerous levels of password security to your setup.

The links in this article take you to other posts that drive a bit deeper. Suffice it to say, keep going! You really Need2KnowCrypto, and we’re here to help!