The concepts of blockchain are quite revolutionary and it will take some time to grasp all of them for laymen. It is good to get familiar with the terminology so that as you go on trying to learn, curiosity takes you over and you end up learning more about the term you have been hearing. So take note of the terms below as you research more about Blockchain.
Let us start with the use case of bitcoin before going further. The person / organization that came up with the bitcoin concept called themselves Satoshi Nakamoto. It is not known to the general public who or what Satoshi Nakamoto is. Satoshi is the smallest unit a bitcoin can be broken into and it is 0.00000001 BTC OR 100 million Satoshis make 1 bitcoin.
Bitcoin uses blockchain algorithm at the core. Let us try to understand the use case Satoshi Nakamoto was trying to solve. So, if cryptocurrencies are available in a digital form, the most important thing that is needed on the platform is to avoid “double spending” of the currency. As in, if I have 1 BTC with me and I gave it to you, I should not be able to give 1 BTC again to someone else. Isn’t this what banks do? But do you know how much of effort goes into this? You have various banks and a central regulatory authority RBI facilitating the clearing of transactions. Bitcoin use case is to do away with this form of centralized clearing of currency. SEC of USA has described bitcoin as “Decentralized Currency”.
So, how does blockchain achieve this? How does it maintain decentralized clearing mechanism and avoid “double spending”. Blockchain basically gamifies the whole thing by offering incentives to miners and by making it tough for hackers. Central actors to the entire blockchain mechanism are “miners” popularly called “Bitcoin miners”. These miners basically follow a protocol prescribed by bitcoin to verify the authenticity of bitcoin transactions. Now, the decentralizing part is facilitated by the fact that the transactions (with essential information encrypted) are made available to anyone acting as a miner to run an algorithm with some basic checks to verify the validity. So, if I am a miner, I would first put together some unverified transactions and create a “Block”. I will run this algorithm on all the transactions in the block and either accept or reject them. And then I add this block to the Blockchain at the end. Blockchain is nothing but a “distributed ledger” for laymen who can understand ledgers. If you are a bit into computer science, Blockchain is a linked list of various blocks which make up all the transactions that ever happened in the bitcoin world.
So, once I verify my block, I would add it to the blockchain and publish it to the world.
Here are some questions to ponder. Now, how does this mining generate newer bitcoins? What is the term “Nonce”? “Merkle tree” / “Merkle root” – what are they? What is the underlying encryption? “Hashing” / “SHA256” – how do they work? How does individual identity get encrypted – “Public Key”, Private Key”, “Digital Signature” – how do they help? What is the concept behind “Proof of Work”? What is the need for “Proof of Work”? How does that make a “blockchain “tough” to penetrate for a hacker? How is trust achieved by blockchain mechanism? What is the underlying assumption behind blockchain’s trust mechanism?
Now that a lot of questions have been raised in the previous paragraph, we will leave this with a few facts that would be good to digest. Initially when bitcoin was launched, approximately 50 bitcoins were generated / mined every 10 minutes. This went on for about 4 years (until 210,000 blocks were added), then the rate of generation / mining has come down to 25 bitcoins every 10 minutes, and after another 210,000 blocks got added, the rate came to 12.5 BTCs every 10 minutes (approximately). When will this rate reduce to 6.25? Wait for the answers.