Beginner 101: A detailed Blockchain guide for dummies

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The term, Blockchain is actually, a combination of two words – Block (list of digital records) and Chain (cryptography linked together). This simply means that blockchain is list of digital blocks that are chained together using cryptographic nodes.

In financial industry today, unlike the blockchain development, there are lots of middlemen (e.g. payment processors, banks, and credit cards companies etc.) These intermediaries are institutions that help to establish trust between buyers and sellers, where-by ensuring accurate transactions.

These are the major reason why cost of transactions tends to be costly or cheap depending on speed.

What is Blockchain technology?

Blockchain simply eliminates the need for middlemen by providing a decentralized, trust-less ledger system with little or no exposure to fraudulent activities.

Although, blockchain is commonly used in connect with bitcoin and altcoin transactions, it is also used by some companies to disrupt huge data, supply of chain to gamblers and the internet.

How does blockchain work?

Cryptographic Nodes

These are large network of computers that runs the blockchain. They validate and keep records of all transactions by solving complex mathematical algorithms.

Each of the nodes has a complete history of transactions, and that means, no one can change any data without letting the whole systems know (or they will definitely reject the change instantly).

Benefits of blockchain development

Fast Transactions

It is very fast because already it has cut out the middlemen that tends to delay most financial transactions, and validation are even inbuilt into the systems.

Cost effective

Blockchain is very cheap compared to what middlemen charge to move finance between financial institutions.

Privacy

It is secured to the extent that transaction details only remains within the nodes in the networked systems and cannot be seen by humans.

Money, virtual currency, cryptocurrency and fiat money

The money matrix - getting started with bitcoin

Fiat money

Fiat money is a currency that a government has declared to be legal tender, but not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand, rather than from the value of the material that the money is made of.

Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy. Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation’s paper currency, like the U.S. dollar bill, the money will no longer hold any value.

Virtual currency

In the process of trying to define “virtual currencies,” we run into several problems.

In fact, it is easier to define what they are not, rather than what they are. The problem becomes all the more evident when considering that a “currency” essentially requires a statutory definition. Virtual currencies, however, lack a normative definition. From the “synthesis” of this syllogism, we can easily deduce that virtual currencies are not actually “currencies” because of the legal vacuum surrounding them.

This makes them both extremely attractive and dangerous as they’re still in the “legal gray zone”. This absence of clear regulation, however, does not mean that they are not being closely monitored by regulatory agencies around the world.

Virtual currencies have traditionally been classified according to their relationship with “real money” and the “real economy”, taking into account if and how the money flow between virtual currencies and real currencies works, and how virtual currencies can be used to purchase real goods and services.

According to these characteristics, the existing virtual currency schemes have been divided into

(a) closed virtual currency schemes (that have scarce, if any, interaction with the real economy; e.g. currencies used for online games);

(b) virtual currency schemes with unidirectional flow (that implies an irreversible conversion at a specific exchange rate from the “real currency” to the “virtual currency” that can then be used both to buy virtual and real goods and services; e.g. “credits”, “vouchers”, “points” or other “bonus” systems);

(c) virtual currency schemes with a bidirectional flow (virtual currencies can be bought and sold according to exchange rates with real currencies and can also be used to purchase both virtual and real goods and services; e.g. Bitcoins).

However, the virtual currencies that are most interesting to the watchful eye of the regulators are Bitcoin, Etherium, Litecoin, Dogecoin (A satirical meme created with the sole intention of trolling the “crypto investors”) and other top-ranking cryptocurrencies on the market.

Cryptocurrency

A cryptocurrency is a form of virtual currency that uses encryption techniques as means of securing the verification of transactions. Cryptocurrencies can be centralized and decentralized, depending on the method of issuance of currency.

Bitcoins are considered to be a “cryptocurrency” specifically because they rely on a mechanism of peer-to-peer cryptography for the validation of transfers. Users can exchange Bitcoins through a mechanism of verification known as “mining” which is based on a public ledger (also known as Blockchain) that records information about the sender, receiver, time and amount of “currency” in the transaction.

When the owner of a Bitcoin transfers it to a recipient, a group of so-called “miners” consults the ledger to verify the owner’s claim of ownership, solves a complex cryptographic problem, and annotates the transfer to the recipient by logging the transaction on the ledger (where the recipient will now appear as the new owner).

As an incentive for mining, which involves the “sacrifice” of computer power and therefore huge amounts of electricity, the “miner” that solves the cryptographic problem is awarded newly generated bitcoins. This is also known as the Proof of Work method of verification of transactions.

Bitcoin is, at least in theory, a completely decentralized currency.

Status of “money” and virtual currencies

The nature of “money” of decentralized cryptocurrency is to be questioned.

The legal nature of money is traditionally identified with three functions:

(i) money as a means of exchange;

(ii) money as a unit of account;

(iii) money as a store of value.

Bitcoins (and other decentralized cryptocurrencies) are used for the exchange between a “unit of account” on one hand and (virtual or real) goods and services on the other. The first two functions normally attributed to money can be said to also be functions of decentralized cryptocurrencies.

An argument can be made that the last function, that of a “store of value” can be attributed to Bitcoin and other decentralized cryptocurrencies, and this last feature has raised major concerns because the function of “store of value” may be dangerously close to that of an “investment instrument” (that is thoroughly regulated in almost all legal systems).

The argument that Bitcoin can be considered to have the function of “store of value” is usually deducted from the deflationary monetary policy of the currency and the tendency for decreased market volatility in value over time as the market cap gets bigger and bigger and more users join in every day.


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