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Crypto 101 - Blockchains 🧊⛓

5 minute crypto guides by me to make you smarter than 95% of retail crypto investors 🚀

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Many investors avoid crypto as an asset class altogether. Those that are interested, have TONs of questions. Having a long-term view on crypto requires a decent understanding of what makes it tick and its usefulness.

Here's what my article will cover:

  • What are blockchains?
  • Use Case
  • How do you mine a block?
  • Chaining it all together

Let's dive right in 🤿

What are Blockchains?

It's a type of database. A database is simply a structure that stores data. Data is usually stored in a tabular format (think Excel files). Blockchain stores data in blocks, and chains them in a chronological order. What does the actual blockchain look like though?

WTF?

Don’t worry, we can rely on 3rd party sites (like the blockchain explorer) to parse this info easily. Click under latest blocks and you'll be able to see what the header looks like (& the thousand-odd transactions if you wish to).

As an example, we will be referring to the picture below as the name of the block. It's the hash of the block header that was mined on 7:32 PM 27 Aug 2021.

If you prefer, you can simply find the block by the block height: 697823 instead of typing.

Use case

Blockchains are most often used as a database to store transactions, which has been its primary use case since Bitcoin was created. In the first picture, the block has 2 parts: Header and Body.

The header is the name of the block, whereas the body stores all the transactions. If you can't wrap your head (ha) around this, think of it this way: It's hard to recognize somebody if you cover their face and only show the body. On the flip side, you can immediately recognize the face below without seeing the body. The block header is used (with other pieces of info) to mine and validate the next block. Let's assume the block header is what was attached above with a block height of 697823.

Now, we know that miners keep the Bitcoin network going. We also know that since blocks store transaction data, we need to let everybody have the same information (i.e. achieve consensus). This ensures that all participants agree on what the right chain of blocks are, forcing new nodes to also adhere to the current consensus. This is done via a consensus algorithm. In Bitcoin’s case, its algorithm is Proof-of-Work. ⛏⛏⛏

How do you mine a block?

The 3 key pieces of info needed to mine a block (and earn rewards):

  1. Previous block header hash
  2. Block of transactions (Merkle Root) 🌲
  3. Nonce (Arbitrary Number) 🔢

First, we need to understand what a hash is. In simple terms, a hash is a 64-alphanumeric character (see block name). Any length of input data (numbers, paragraphs, or even whole books) can be hashed into a 64-alphanumeric character.

Try it out for yourself here.

It is used to identify the block header, and the individual transactions within as well.

Now that we know what a hash is, the previous block header hash is simply the hash of the header block.

Next, how can we identify a bunch of transaction in each block? We need a space-efficient way to trace all transaction from the header. Let’s think about this: How can we represent thousands of transactions with as little space as possible? Enter Merkle Trees. 🌲

The exact definition can be found here.

It’s a (recursive or repeating) function that can combine an infinite number of transactions into just 1 hash. How does it do so? Setting the context right, the average block processes upwards of 1000 transactions per block. Now, consider an example block with 4 transactions.

First, we hash the transactions L1 to L4. How do we hash “Alice pays bob 1BTC”? Recall that just about anything can be hashed, since data, at its lowest form is just 1s and 0s. The Merkle Tree works like so:

  • Hashes all 4 transactions (output = 4 hashes of 64 characters long)
  • Hashes are paired together (2 x 128 characters long)
  • These are hashed again (2 hashes of 64 characters long)
  • Hashes are paired together (1 x 128 characters long)
  • The hash is hashed again (1 hash of 64 characters long)

Steps 1 to 4 repeat until step 5 is reached (only 1 hash of 64 characters long) is available. That is called a Merkle Root. If there is an odd number of transactions, the last odd transaction is then duplicated and paired with itself. The Merkle root will be included in the block header. Now we know how a block of transactions look like. The full list of hashed transactions will form the Merkle Tree. 🌲

Lastly, the Nonce is simply just an arbitrary number! The block as mentioned above, has a Nonce of 28,557,913.

Chaining it all together

This is the information stored in the block header. The highlighted info is still yet to be determined. Hence, miners race against time to brute force the Nonce needed to generate the hash with the required number of leading zeros. Miners all have to start from 1, which explains the energy-intensiveness. This is also the reason why this form of algorithm is called proof-of-work (as it expends energy while generating that proof).

Why leading zeros? This is a function of the difficulty target (which adjusts routinely), making it possible for blocks to be mined, with just about an average of 10 minutes even with technological advances in computing power. Copying the name of the block below:

Once a miner generates a hash with the required number of leading zeros, the block is considered mined; the miner receives the reward, and the mined block is broadcasted to all nodes in a blockchain. The miners then start on mining the next block that needs to be validated.

In a nutshell, this is how participants achieve consensus in the bitcoin network. There are, of course other consensus algorithm like Proof of Stake and many more.

Thank you for reading thus far. Hopefully, you have gotten a better understanding of how blockchains work and how Proof-of-Work is used in the Bitcoin network.

Stay safe and Stack Sats!

Cheers,

Joey

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This is a long form of my original thread on Blockchain here on Twitter.

Do keep a lookout on Seedly for my next piece, Layer 1s and Layer 2s!

PS: Also check out @Seedly's comprehensive guide on crypto (with a focus on investing) here.

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Appendix: Block details via blockchain explorer :)

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