The Basics of Bitcoins and Blockchains_ An Introduction to Cryptocurrencies and the Technology that Powers Them

What do all of these coins and tokens have in common? All transactions related to them, including their creation, destruction, changes of ownership, and other logic or future obligations, are recorded on blockchains: replicated databases that act as the ultimate books and records—the ‘golden source’ that represents the universal understanding of the current status of all units of the digital asset. Bitcoin’s blockchain is an ever-growing list of every Bitcoin transaction that has ever happened, right from the creation of the very first Bitcoin on 3 January 2009, through to the most recent transfer or payment from one account to another. Ethereum’s blockchain is a list of transactions involving the cryptocurrency Ether, a multitude of other tokens (including those representing CryptoKitties) and other related data, all of which is recorded on Ethereum. Different blockchains have different characteristics, so much so that nowadays it is almost impossible to make a general statement about ‘blockchain’ without being wrong for some particular example. Some blockchains, like the well-known Bitcoin and Ethereum chains, are public, or permissionless, meaning that their list of transactions can be written to by anyone, with no gatekeepers to approve or reject parties who want to create blocks or participate in bookkeeping. Selfidentification is not a requirement to create blocks or validate transactions. Other blockchains can be private or permissioned, in that there is a controlling party who allows participants to read or write to them. And finally, we need to distinguish between protocols, code, software, transaction data, coins, and blockchains. Bitcoin is a bunch of protocols: rules that define and characterise Bitcoin itself—what it is, how ownership is represented and recorded, what constitutes a valid transaction, how new participants can join the network of operators, how participants should behave if they want to be kept up to date with the latest transactions, and so on. These protocols, or rules, can be described in English or any other human language, but are best articulated in computer code, which in turn can be compiled into software—Bitcoin software—that enacts those protocols, i.e. makes them operate. When the software is run, Bitcoin coins are generated and can be sent from one account to another. These actions are recorded as transaction data, and this transaction data is bundled into bundles or blocks, and linked together to form the Bitcoin blockchain. So, to recap, Bitcoin protocols are written out as Bitcoin code which is run as Bitcoin software which creates Bitcoin transactions containing data about Bitcoin coins recorded on Bitcoin’s blockchain. Got it? Good. Not all other cryptocurrencies or tokens work this way, but it is as good a basis as any to start the journey. Some people think of Bitcoin as the next evolution of money—it is described as a (crypto) currency after all. So we need to understand a little more about money. What is money? Has it always been the same? How successful has money been? Are some forms of money better than others? Can the nature of money ever change, or is what we have going to be the same for evermore? Do cryptocurrencies sit easily alongside today’s money, fulfilling a niche or purpose that existing forms of money cannot serve, or are cryptocurrencies competitors to today’s money that threaten the status quo of state-issued currency? This book should give you a good well-rounded education into the basics of bitcoins and blockchains and assumes no specific starting expertise. We start by defining and understanding the nature of money. Then we dive into digital money and how value is really transferred around the world. We then explore a few key concepts from a branch of mathematics called cryptography, so that we can then move to cryptocurrencies themselves. In the cryptocurrencies section, we dive into the Bitcoin and Ethereum networks, and the Bitcoin and Ether digital tokens—what they are, how to buy, store, and sell them, how to explore their blockchains, and the risks in managing them, including the unique challenges in moving this new digital money around the world. Finally, we discuss the types of blockchain technology that are being explored by banks and big businesses to join up their databases and do more efficient business. Although I have my personal biases and interests, throughout the book I try to maintain a neutral position on the cryptocurrencies, tokens, and blockchain platforms. I try not to neither over-sell them nor be overly critical. I leave it up to readers to conclude for themselves whether these technologies are a trend or a fad, useful or useless, good or bad.