Cryptocurrency for Beginners

How does blockchain work? For Dummies

2 min read
Blockchains have two sides:a. The decentralized spreadsheet database aspect b. The decentralized currency sideWhile blockchain will provide the much needed transparency in many government administrations system.The biggest challenge regulators are concerned with is how to claim taxes on investor gains.

How does blockchain work? (For Dummies)

A blockchain works a like a sophisticated spreadsheet.

What’s special about blockchain technology is that once information has been entered, it can not be modified or deleted.

The most popular and successful blockchain is Bitcoin. Ethereum smart contracts are another type of blockchain

NFTs also use blockchain technology.


How does blockchain work?

A blockchain is special public database where entries need to be approved by a group of people.

Once these entries have been approved, they can not be modified or deleted.

What is so fascinated about the cryptocurrency space, is that they have been able to attach value to these entries.

Each cryptocurrency or token runs on its own blockchain.

Bitcoin’s Blockchain is like dropbox.

Bitcoin blockchain works a lot like Dropbox folders.

Where current data is constantly transferred from one folder to another, however, it needs the approval of a community to be transferred.

The biggest limitation of Bitcoin is that new data is locked, so as more users arrive in the ecosystem, the value of the data increases as they also want a piece of that data in their folders (a.k.a wallets)

Smart contracts = vending machine.

Ethereum’s blockchain is like a vending machine factory.

Vending machines do not need someone on site to operate them.

Anybody can come and make a million copies of the vending machine within minutes.

What is innovative about the Ethereum blockchain is that the new entries do not need to be mined in order to be created and the founders can simply generate as many Ethereum tokens as they wish within minutes.

Ethereum tokens (ERC-20 tokens) are most commonly used by blockchain start-ups for crowdfunding.

I.C.O (Initial Coin Offerings)

Initial coin offerings are a modern take on I.P.O (initial public offerings) where companies would list there companies on the stock exchange and sell shares in the company as a way to raise capital.

The problem with I.C.O is that the token buyers rarely have any stakes in the company and the founders reek all the benefits of crowd funding without relinquishing ownership.


NFT Blockchains are like like video games

NFTs are another twist on those fancy spreadsheets except that instead of random numbers, images and media can be attached to them.

What makes NFTs a disruptive, is that they give artists control over their content as the number of copies and ownership will be clearly entered in the blockchain.

NFTs is also changing legal landscape when it comes to proving proof and certification of ownership.

Powering that vending machine

The Bitcoin Blockchain is powered through mining.

Ethereum has a different system, where transaction fees are determined by supply and demand.

The problem with this system is that as more users buy the token, the transactions prices (gas fees) go up.

The fancy spreadsheet databases which became a trillion dollar market

Blockchains have two sides:

  1. The decentralized spreadsheet database aspect
  2. The decentralized currency side

While blockchain will provide the much needed transparency in many government administrations system.

The biggest challenge regulators are concerned with is how to claim taxes on investor gains.

Some countries has banned cryptocurrencies all together, whereas some have made Bitcoin legal tender.

China has issued its own digital currency.

About The Author