A Beginner’s Guide
What is a Blockchain?
In this guide I’ll explain what a blockchain is in non-technical terms so you can choose which blockchains you want to use for your crypto investments.
What is a blockchain?
In simplest terms, a blockchain is a new piece of programming technology. There are three main purposes to a blockchain:
- To permanently store information
- To keep that information distributed across many devices
- To create programmable contracts
How a blockchain works in non-technical terms
It can be super easy to get confused by what a blockchain is and how it works if you don’t have a computer science degree. I’ve found the best way to understand how a blockchain works is through metaphor.
The best way to think about a blockchain is to imagine it like a permanent notebook. Anyone can use this notebook to record transactions between each other and, perhaps the best part of the notebook, no one can erase anything written on it.
Here’s an example of one way people use the “blockchain notebook”:
Ben wants to send money to Sarah.
In the blockchain notebook the following is recorded:
Ben at address 123 sends $10 to Sarah at address 456.
A few months later, Sarah wants to send money to Ben.
In the blockchain notebook the following is recorded:
Ben at address 123 sends $10 to Sarah at address 456. Sarah at address 456 sends $35 to Ben at address 123.
Notice that the first transaction Ben sent is still in the notebook. Nothing is ever erased from the notebook, things can only be added to it.
If Samantha wants to send money to her friend Louis, here’s what would be recorded to the blockchain notebook:
Ben at address 123 sends $10 to Sarah at address 456. Sarah at address 456 sends $35 to Ben at address 123. Samantha at address 777 sends $6 to Lewis at address 828.
What is the main benefit of blockchains?
The main benefit of blockchains is that they are very secure. As you can see from the example above, once a transaction is recorded in the blockchain, it can never be deleted.
This means that if someone tries to argue that they were or weren’t paid for something, everyone can look at the blockchain notebook and see what actually happened.
So, in the example above, if Sarah claims that Ben never paid her, we can simply look at the first line of the blockchain and confirm that Ben did actually pay her.
What does it mean that a blockchain is distributed?
The second area that makes blockchains secure is that they don’t live on any single computer or server. This is very different from how the rest of the internet works.
A website, for example, is physically stored on a server (or a few servers). If those servers crash or get destroyed, the website no longer functions. And, if there are no backup copies of the website, the website could potentially be lost forever.
A blockchain isn’t stored on a computer or server. The blockchain is distributed across hundreds of thousands of computers around the world. If several of the computers crash, it doesn’t matter because all the other computers continue running.
In addition, all the computers check with each other to make sure they all have the most updated copy of the blockchain. This is called “consensus” and it’s what makes the blockchain very difficult to hack.
What happens when a blockchain is hacked?
Hacking the blockchain is very difficult to do because of what’s known as the “consensus mechanism.”
The consensus mechanism just means that all the computers that are running the blockchain are always talking to each other to make sure that all of them have the same information at all times.
Here is simple example of how this prevents a hack:
Computer 1: Ben at address 123 sends $10 to Sarah at address 456. Sarah at address 456 sends $35 to Ben at address 123.
Computer 2: Ben at address 123 sends $10 to Sarah at address 456. Sarah at address 456 sends $35 to Ben at address 123.
Computer 3: Ben at address 123 sends $10 to Sarah at address 456. Jim at address 666 gives $5000 to Lisa at address 567. Sarah at address 456 sends $35 to Ben at address 123.
Computer 4: Ben at address 123 sends $10 to Sarah at address 456. Sarah at address 456 sends $35 to Ben at address 123.
In the example above, someone tried to hack into the blockchain at computer 3 and steal $5000 from Jim.
But, because the other 3 computers don’t have that transaction recorded on their versions of the blockchain notebook, they can let computer 3 know that this isn’t a valid transaction.
All this happens near instantly so that the hack can’t happen in the first place.
When you do hear about hacks on the blockchain, what’s usually happening is someone has hacked a centralized exchange (a crypto company) not the actual blockchain.
Are all blockchains the same?
There are many blockchains out there, each trying to serve a different purpose.
The first and most popular blockchain is Bitcoin. Bitcoin’s main benefit is that it’s incredibly secure. It has this security because it only allows a small number of transactions to be written in it’s “notebook” at a time. This means that it tends to be much slower than other chains and as a result also has higher gas fees TK (fees for writing in the notebook).
The second most popular chain is Ethereum. Ethereum’s main benefit is that it allows people to write programs on top of it known as “smart contracts.” This means that people can add functionality to Ethereum similar to how people can add apps to an app store. Ethereum is also a very secure chain because it also only allows a small number of transactions to be written in it’s “notebook” at a time.
The third most popular chain is Solana. Solana’s main benefit is that it allows a lot more transactions to be written to it’s “notebook” (50,000 per second compared to Ethereum’s 45 per second). Solana is also a secure blockchain, although not as secure as Ethereum or Bitcoin.
The blockchains above are all “Level 1” chains, meaning they’re a base layer. There are also “Level 2” chains which are built on top of the Layer 1 chains. Some examples of Layer 2 chains are Polygon and Avalanche. Learn more about Level 1 and Level 2 chains here TK.
What’s the best blockchain to use?
Which blockchain you use is really a matter of what you’re looking to do. If you want to store a lot of money in a secure place, Bitcoin is a great blockchain because it’s super secure.
If you want to buy NFTs or earn interest on your money, Ethereum is a great chain because it’s both secure and has added functionality.
If you want to buy something small like a coffee or send $20 to a friend, Solana is a great blockchain because it will complete the transaction quickly and charge you less in fees.
Takeaways & Resources
There is endless debate about which blockchain will “rule them all.” Similar to the early days of the internet, cryptocurrencies will rise and fall. The one certain thing is that blockchain technology is here to stay and will provide immense opportunities for those who get involved in it early.
If you’d like to learn more about which cryptocurrencies might be good investments, check out my live workshops.