Blockchain Primer

What is a blockchain?

A blockchain is a shared database/ledger. Each blockchain has a different protocol (set of instructions) for writing information to the database/ledger. These usually involve some sort of consensus mechanism -- a method for determining which information gets included in the database and which information does not.

What are the advantages of blockchain?

Most databases are centralized. It can be prone to outages if failovers are not implemented.

Blockchain is decentralized. There is no data loss when nodes (computers in the system) go offline. Nodes that come back online can simply request anything it missed from a peer node on the same blockchain to catch up.

Blockchains often work with information generated from centralized databases. These are generally referred to as “off-chain” functions. Deciding what data to process off-chain and what data to process on-chain is the sort of optimization that a blockchain-knowledgeable architect should examine carefully. This usually involves thoroughly understanding what functionality needs to be optimized for speed and what functionality needs to be optimized for accuracy. For example, an easy way to tell if a cryptocurrency exchange is at least partially centralized is if there are gaps in its historical data.

(debating: go into trustlessness and permissionlessness or not?)

What is cryptocurrency?

Cryptocurrency is a digital currency, that is, it doesn’t require a physical representation. More specifically, it is a byproduct of blockchains (which are secured by encryption). In order for blockchains to run, computers have to expend resources to run them (electricity/computing power). To get computer owners to commit/dedicate resources toward running blockchain nodes (a.k.a. “miners”), they must be compensated and/or rewarded for doing so. This manifests itself in a token/coin that represents a redeemable value known broadly as cryptocurrency (or “gas”).

What is the difference between a cryptocurrency (coins and altcoins) and a crypto token?

Not all in the field are in agreement over the definitions, but there is some degree of consistency in the vernacular. Generally, a coin is a unit of account utilized on a blockchain (database/ledger). Initially, these were not separate concepts (i.e. Bitcoin is the unit of account on the Bitcoin blockchain), but as the technology evolved, more specific/distinctive terminology was required.

Often times when the blockchain comes to a point where there are two different versions of transaction history that engender substantial contention, some of the nodes decide that instead of reconciling with the majority, they want to branch off on their own with their own version of history. This creates a second blockchain that is tangential and becomes separate from the first (a.k.a. "fork"). These are often referred to as altcoins (e.g. Namecoin).

The most conservative interpretation of what qualifies as an altcoin is a blockchain whose underlying software isn’t significantly different from its original blockchain, so it’s somewhat similar to having a different set of books (prepared by two different accounting firms) while adhering to similar accounting principles and methods (perhaps analogous to GAAP and IFRS). Less conservative interpretations of what qualifies as altcoins have included every cryptocurrency that isn’t Bitcoin. This can be an unfair assessment with minimal utility when the underlying software (consensus protocol) is substantially different, as with the Ethereum blockchain and its corresponding cryptocurrency, Ether.

Ethereum itself has at least one altcoin (Ethereum Classic), but also offers a platform for developing decentralized applications (dapps). The twentieth proposed tool in the platform’s toolbox (ERC20) is a standard widely used for creating smart contracts. From the other direction, creating a smart contract that follows the ERC20 standard ensures that the protocol in the smart contract will be compatible with the blockchain protocol. (However, just because people claim to have created an ERC20 token doesn’t automatically mean their smart contract followed the standard.)

The typical cryptocurrency ICO is actually an ERC20 token offering (purportedly representing an asset within the dapp) and not a coin. As of early 2018, the second most popular platform for smart contracts is WAVES (which utilizes Bitcoin).

What is a cryptocurrency wallet?

Cryptocurrency wallets allow you to see how much cryptocurrency and crypto tokens you have. Some wallets are only hooked up to one or select blockchains, so they would only be able to show you how much cryptocurrency you have in that or those blockchains, respectively. This is similar to bank statements and their online access portals where you can only see account balances and transactions for the accounts that you have with that bank. If you subscribe to a service that aggregates the information from your various banks’ online access portals for you (e.g. Mint.com), then you can go to one place to view all of that.

On the other side, wallets can be hooked up to one or more addresses. Addresses are like bank accounts - each blockchain has a different set of addresses from which they assign accounts. (To be continued ... discussion re: hot & cold storage)