The Blockchain Explained in Plain English

The financial community regards "the" blockchain as a heaven-sent miracle.
All the venture capitalists are funding blockchain startups.

Mike Crawford

Mike Crawford
Consulting Software Engineer
mike@soggywizards.com

The Long Island Iced Tea company really does make iced tea. But when they changed their name to "Long Blockchain" their stock price doubled in just one day.

A blockchain is a recording medium that cannot be changed with once an entry is written to it. In the case of cryptocurrencies such as BitCoin the blockchain is a tamper-proof ledger.

Your checkbook is a kind of ledger.

Cryptocurrency blockchains prevent the same currency from being spent two or more times.

However there is a well-known vulnerability in that cooperation by the majority of the "hash rate" - loosely speaking, the majority of the people who operate the mining rigs that create BitCoins - can tamper with that almost-but-not-quite tamper-proof record. That's a real concern because most of today's hash rate is under the control of just a few people in China.

My LiteCoin mining rig produces only a microscopic speck of hash rate compared to those Chinese folks.

Satoshi Nakamoto, the creator of BitCoin intended for it to enable online payments that don't require such third parties as banks or card payment services. To the extent it really can be used for peer-to-peer payments BitCoin is a threat to Visa, MasterCard and the like.

But BitCoin works poorly for payments because BitCoin transactions take a very long time to settle - sometimes hours. These days BitCoin is only used for truly risky speculation. Economists don't regard it as a form of currency because BitCoin's wild volatility makes it a very poor store of value.

Many financial firms have announced some manner of blockchain initiative, but it is unclear to me that blockchains will really do them any good. Doubtlessly their enthusiasm results from a poor understanding of what blockchains really do.

BitCoin, LiteCoin and Etherium all use blockchains to keep records of their transactions. They are collectively called "cryptocurrencies" not because they keep anything secret but because blockchains use a cryptographic process known as "authentication" to keep those transaction records tamperproof.

Suppose you were in the military and you received an email from your commanding officer that said "Attack at dawn". How do you know that the attack order really came from that officer? The enemy could be setting a trap for you!

That's what authentication is for: to ensure that the message really comes from a particular person, and that the message has not been changed on the way from its sender to you: maybe that officer really said "Attack at sunset"!

How can we authenticate cryptocurrency transactions? We use a process called "hashing".

The hashing used by BitCoin and LiteCoin is very complicated, so I'll start by explaining a very simple kind of hash known as a "check digit". Check digits are used so we can be sure that important numbers - such as credit card numbers - are written down correctly. We find the check digit for a sequence of digits by adding all the digits together. The digit in the 1's place is the check digit. Let's find the check digit for my phone number, (917) 386-3996:

(COMING SOON)

You may have seen the word "hashrate" in news articles and message board posts about blockchains and cryptocurrencies. The blockchain works better if we can hash really, really fast.

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