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In this article, I will give you a peek into how the Bitcoin system works. This is important to help you understand how a blockchain operates within the Bitcoin system of a network of peers. Just as a peer in the real world is someone on your level.
In the computer world, a peer means a computer that operates exactly the same as you. Hence the name peer-to-peer network. Every computer in the network is a peer and acts in the same manner. Every computer in the network has software that makes it a “node” on the network.
Imagine that you’re walking down a crowded city street, and a piano falls from the sky. As dozens of people turn to watch, the piano crashes down right in the middle of the street. Then, without a second to lose, every person who witnessed the event is strapped to a lie detector and recounts exactly what they saw.
They all tell precisely the same story, down to the letter. In other words, each witness or peer verify the information about what happened with the accident. In the same way, the witnesses verify an incident, peer-to-peer computers or “nodes” verify all transactions that occur within the blockchain. All of their stories or information must match and be verified in order for it to be included in the blockchain.
Technically What is a blockchain?
This will be like going into how the cake is put together in the earlier analogy. The technical aspects are like a rabbit hole. Therefore, I won’t go too deep or it will need technical language to explain.
Furthermore, you use the internet every day, do you really care to know all the technical aspects and inner workings to use it? No, you really don’t.
With that in mind, I will explain the surface level workings of the blockchain. Or if you prefer, the cake. The blockchain is a vast chain of information blocks spread out all over the world on different computers (peers). Depending on the network they are associated with, the blocks can have different types of data stored on them.
They are decentralized meaning no one has to go to one source for all the information. The blockchain is public and transparent. With bitcoin, the data stored on the blockchain is a digital ledger.
In other words, it’s a digital version of a checkbook ledger with debits on one side and credits on the other. A blockchain cannot be changed by anyone.
The blocks can’t be moved once in place. No government can order anyone to change the blocks. No dishonest person like a criminal or a hacker can change the blocks. The placement and verification of the blocks act like a digital timestamp. Any information that gets stored on a blockchain is permanent and stored there forever. You can’t get rid of it. It is extremely reliable through cryptographic coding.
When a person chooses to join a network they download a copy of the blockchain onto their computer. Each computer or peer in the network has a full copy of the blockchain. It can’t be altered in any way.
When they have the full copy of the blockchain on their computer they are called a node. Based on state-of-the-art mathematical principles every node in the network continuously agrees on the current information on the ledger and every transaction in it.
If anyone tries to be dishonest and corrupt the ledger, the computer peers will not agree and reject the transaction from the blockchain. This is all done electronically and continuously. Therefore, we can always trust the blockchain. Every transaction is public and thousands of “nodes” or computer peers unanimously agree that a transaction has occurred on date x at time y.
It’s almost like there is a notary present at every transaction. Because it is decentralized, on millions of computers, it makes it tamper-proof and harder to hack. If all the information and record of the money was stored in a central location like the bank’s computers, a thief simply has to find a way to break into the bank computers to steal the information and assets.
The decentralized ledger allows multiple parties to collaborate without having to trust each other. You no longer need one person or organization to be at the central point to determine what the correct data is.
In the falling-piano analogy, the “bystanders” who agree on blockchain events are actually different computing peers, geographically isolated from each other. For the lie-detector test, they show a “proof of work” — a sort of vetting process for proving that the computer arrived at the correct outcome in the correct way.
To falsify a ledger entry would need getting more than half of the people (peers) who saw the piano fall to all lie in the exact same way, at the exact same time, without any ability to coordinate beforehand. In short, it can’t be done. This is why people are getting excited. It’s not just about bitcoin and cryptocurrencies.
It’s about the technology behind it and the many ways it will be used to change how we do things in society. What if you could have found out about Microsoft when it was in its development phase and invested in it before everyone else found out about it? What about Amazon, or Facebook back in the early stages? Would you have invested in them? Every investor and entrepreneur knows that millionaires are made before the masses figure out what is going on.
They get to the investment spot before everyone one else and wait for the tidal wave to come. In other words, timing is crucial! You obviously already know something about the cryptocurrency revolution or you would not have bought this book.
Now I hope that you understand it at a level that you will take action. Blockchain will not only be the internet of digital currencies but of anything that has been centrally located and needed third parties for verification and trust of information.
Blockchain is a type of communication protocol that removes the need for centrally trusted 3rd parties like banks. Everyone on the network guarantees the integrity of the network and the information.
Trust doesn’t scale. In other words, you can do business and transactions face to face with cash. You hand someone your money and they give you the product or service. But on the internet, you might not know the person and they can be on the other side of the world.
Therefore, what works face to face doesn’t work in the digital world. Because of the way a blockchain works the records are public and can’t be changed. It is a network that no longer needs to trust individuals or institutions. However, you are trusting the integrity of mathematics and the network that has been proven many times over.
Like you trust that on a two-lane highway the other person will stay in their lane and not come head-on into your lane. No need to trust a middleman or central agency that keeps and verifies all the records who you must also trust that they are doing what they say they are doing. In a way, trust means that you choose to remain in the dark about something.
Because all the transactions in a blockchain ledger are public there is no need to remain in the dark. Trust is no longer a necessary component of the transaction. The currency in the blockchain cannot be seized or held up because everyone agrees on who owns what.
Because the information is decentralized and public, you no longer have to go to the one person or institution with all the knowledge and ask them how much money does this person has in their bank account.
For example, if someone writes you a check for your goods or service, you have to trust that they have the funds in their account. Not only that the bank charges you a fee for trusting their check if they lie and the check bounces. The bank will verify all that information for you.
It may take several days to go through the process but you really don’t know until all the check is verified by your bank and their bank. You had to blindly trust the whole process.
With blockchain technology, this antiquated process will be obsolete! It blows centralized banking system out of the water because it is much more efficient and private in that identity and ownership are separated within the blockchain.
Blockchain will do to banking what email did to the postal service. It’s going to obliterate it! Transactions are simple and cheap! For example, credit cards can take 3 to 5 percent of transactions in fees. Blockchain with cryptocurrencies takes waaaaay less than that.
Usually, when you charge something on a credit card you must make a minimum purchase amount because of the fees. Because of the efficiency of digital ledger technology there little to no fees involved in the transaction. Blockchain has been used to create cryptocurrencies, but it can be used to track any type of assets.