What is Blockchain Technology and How does Bitcoin Work?
If you have a cryptocurrency wallet, you probably have an idea of what we are going to talk about today, Blockchain and Cryptocurrency also known as digital currency. By the way, Cryptocurrency is still illegal in Uganda.
This is a cryptocurrency guide for beginners looking to understand the technology that lies behind cryptocurrency exchanges and bitcoin blockchain.
What is Blockchain?
Blockchain is a network of computers on the internet from different parts of the world with no central power or governance.
Blockchain is also defined as the protocol that allows decentralization of power. You can send or receive money from your family without any financial institution or third-party in between. That’s just one use case of Blockchain technology.
To understand Blockchain, we might want to look back on the history of the internet and the history of money. Because Blockchain completely operates online, using the internet.
In our Web3.0 post, we looked at a brief intro to the world wide web and the metaverse, and how the metaverse has revolutionized gaming with the power of blockchain allowing gamers to own assets like weapons, and avatars.
In the computer science language, Blockchain is a timestamped append-only log system used for recording various transactions on the decentralized network.
A Brief History of the Internet & the Web
Ethernet — This allows for communication between two computers using an ethernet cable. The first workable prototype of the Internet came in the late 1960s with the creation of ARPANET.
TCP/IP — This allows communication for web content. TCP/IP stands for Transmission Control Protocol/Internet Protocol. The term is used to describe a set of protocols that govern how data moves through a network. Invented by computer scientists Bob Kahn and Vint Cerf in 1974. This also led to a rapid development of local area networks (LANs).
HTML — Tim Berners-Lee introduced the idea of a ‘web of information’ in 1989. By using Hypertext Markup Language (HTML), a hyperlink can point to any HTML page on the internet. It led to the birth of internet browsers.
Cryptography — This helps decrypting or encrypting (hiding) data or information in order for the right people to see it.
SSL/TLS—This is a form of online security. With the growth of internet came a need for a more secure online encryption and decryption of data. Leading to the birth of PayPal back in late 90’s. And later VISA debit and credit cards for online payments.
You may have heard of SSL/TLS Certificate. Your SSL certificate includes a public key and a private key that authenticate your server and let your server encrypt and decrypt data.
HTTP & URL — It allows you to send a message to someone else using the internet.
HTTP is the language computers use to communicate HTML documents over the internet, and the URL (Unique Resource Locator), provides a unique address where the pages can be easily found. Examples include, Facebook (now Meta), Twitter, Amazon, back in 1998.
A Super Brief History of Money & Exchange
Carrie shells and Salt mines were used as a means of exchange in West African countries like Ethiopia and Nigeria. But these types of commodities are heavy and not easy to access, leading to the birth of currency notes.
The Birth of Bitcoin Cryptocurrency & Blockchain
In 2010, Satoshi Nakamoto introduced a peer to peer money exchange paper. This is where some people say Blockchain technology was born.
However, other arguments state that Bitcoin is not the first Blockchain and that Blockchain technology was already introduced way before Satoshi Nakamoto shared the Bitcoin white paper.
With the Birth of Bitcoin, came along a different type of finance called decentralized finance, this is where financial challenges like moving money, lending and borrowing, was simplified with minimal to no third parties involved in these processes.
What is Money?
Money is a store of value or a Social consensus of value on a physical or digital item.
Fiat Money — Is a central currency created by a government sometimes backed by a commodity or asset like Gold.
If you agree that where there is money, there is exchange of value. Here are some of the popular online exchanges you may want to checkout for Bitcoin price and for tracking other crypto assets;
Binance — Binance is one of the largest cryptocurrency exchanges. Any one invest in crypto or trade crypto using the Binance App, just add funds to your crypto account to start trading crypto on Binance. You may have heard of Binance Academy, Binance Coin, Binance NFT, well, all those are products of Binance.
Coinbase — Coinbase is a secure online platform for buying, selling, transferring, and storing cryptocurrency. If you are looking for Bitcoin price in Uganda just visit their website. Other websites that show you the Bitcoin price are Coingecko, CoinMarketCap, among others.
By the way, if you are wondering how you can store your money in a Coinbase crypto wallet, Watch this video below to learn how to create a Coinbase wallet even if you use a Coinbase App in Uganda. Here is the link to your Coinbase FREE Sign up.
CoinMarketCap — CoinMarketCap is the world’s most-referenced price-tracking website for cryptocurrency assets in the cryptocurrency space. They have high quality information to help you draw your own informed conclusions on investments.
The Role of Money
Market — Money is the standard means of exchange in markets whether it’s a crypto market, NFT marketplace, or grocery market. A market is defined in in the Cambridge English Dictionary as the activity of buying and selling shares, bonds, commodities, products, services, and the trading of currencies
Law — Laws governing money are in place but the medium of exchange makes it difficult to manage and control the amendment of these laws. For example, drug running is utilizing Fiat money as the easiest means of exchange, however, with the introduction of credit/Debit cards, it’s increasingly difficult to use them to buy drugs as they are easier to manage and track the transactions in ledgers.
Architecture — The Architecture of money entails the design of money. You can make money in form of a physical or digital token distributed by a central bank or government.
Bitcoin as a Form of Money
Bitcoin is a digital form of money or an electronic cash payment system as defined by Satoshi Nakamoto in his Bitcoin White paper. The value of bitcoin shifts overtime with adoption.
As you many already know, where there is a means of exchange, there are various transactions which call for ledgers to track and record these transactions.
What is a Ledger ?
A Ledger is a way to record economic activity or financial transactions. Blockchain ledgers include transaction & balance ledgers. A ledger is organized in general and subledger. For example, Bitcoin is more of a transaction ledger than Ethereum which is more of a balance ledger.
With the birth of Bitcoin, along came the Bitcoin blockchain, which is the network or ecosystem for Bitcoin users. This Bitcoin blockchain also acts an immutable ledger for bitcoin transactions.
What is a Bitcoin Ledger?
A Bitcoin Ledger (Also known as a cryptocurrency public ledger), is a record keeping system for all the genuine transactions executed on the Bitcoin blockchain network. It also maintains participants’ identities anonymously.
You need to note that there is a native currency for every blockchain network, for example, with Bitcoin, there is (BTC) for Bitcoin cryptocurrency, ETH for Ethereum blockchain, SOL for Solana blockchain, TRX for the Tron ecosystem, XTZ for Tezos blockchain, among others. This currency is used as a base of transactions and trading NFTs in the specific ecosystem.
For example, the SAND token for trading NFTs on The Sandbox marketplace and The Sandbox metaverse, AXS for the Axie Infinity crytpo blockchain play-to-earn game, MANA for the Decentraland metaverse, among others.
Bitcoin as Payment System
Just like a paycheck or payment voucher, you will need details like the Payer, Payee, Timestamp, Amount, ID or contact number.
In Bitcoin language, Crypto wallet, which stores your address and your crypto.
Just like you will find a token or digital currency representing a Blockchain contract, game, metaverse, or DAOs (Decentralized Autonomous Organizations). If you’re looking to jump into the world of Web3, understanding DAOs, how they work will be very helpful.
What are DAOs? How do DAOs Work?
What are Smart Contracts and DApps?
Smart Contracts or DApps (Decentralized Apps) are the application software running on the blockchain just like Meta (Facebook), YouTube, Canva, Wix, among other apps run online using the Internet.
A smart contract is a set of promises or operations in digital form. A smart contract can also be defined as a set of protocols used to automatically perform what a human would otherwise do. Smart contracts are written in a programming language or scripting language known as Solidity.
Examples of DAOs
If you remember, earlier we talked about the tokens used in Axie Infinity (AXS), or the APECOIN used in the Bored Ape Yatch Club and Mutant Ape Yatch Club’s metaverses, the more tokens you own, the more power you have in the DAO to affect decision making.
What is Cryptography in Cryptocurrency?
Cryptography is the process of encrypting or decrypting data or information nodes. Cryptography calls for discussion of topics like consensus, in blockchain language, private and public keys, and hash functions.
Consensus — The basiscs of Consensus you need to know is PoW (Proof of work) and PoS (Proof of stake). Proof of work is how new Bitcoin comes to existance, through intensive use of energy, while Proof of stake is now Ethereum 2.0 where if you stake ETH, you get rewarded. More on the rest of the terms later.
Staking is simply giving in your crypto to be used for and get rewarded.
Tip: Review the Metaverse Web3.0 post for more Blockchain use cases.
Blockchain Finance vs Traditional Finance Challenges
Scalability — You can make up to 20,000 transactions per second using VISA and MasterCard systems. While on Ethereum only 20 tps, and at least some other crypto currencies like Bitcoin, don’t even make 10 transactions a second.
However, there are issues like double spending that bitcoin and blockchain technology come in to solve. What makes it interesting is that some Financial institutions like Absa, and Stanbic Bank are investing in Blockchain related projects and events. For example the Crypto Fest 2022, and the Blockchain Africa Conference 2023.
Tip: Solana (SOL), Cosmos (EOS), Ripple (XRP), and Stellar, are some of the cryptocurrencies with the largest number of Transactions per second. They work on expanding this on a continuous basis.
Fiat Currency Instability — Of course digital currency is unstable, but the value of cryptocurrencies like Ethereum has proved to double or multiply in a very short period of time creating Millionaires and Billionaires than any other economy.
Centralized Intermediaries — PayPal, AliPay, and MPesa are some examples of centralized money exchange intermediaries. Blockchain has let to the birth DeFi (Decentralized Finance), DAOs and DApps (Decentralized Apps) that do whatever the centralized finance institutions can do.
Finance Inclusion — When it comes to inclusion, Blockchain crypto wallets, and blockchain DeFi apps are available in App stores like Google PlayStore and various websites. All you need is internet and a Blockchain crypto wallet or app like Binance, or Coinbase to get started trading crypto.
However, when it comes to traditional finance systems, the requirements and the process at times become a barrier to entry for many, especially those in remote areas.
Blockchain Types (Permissioned vs Permission less Blockchain)
Permissioned Blockchain — You may already be aware of Facebook’s (Meta) Horizon metaverse. This is an example of permission blockchain. A type of blockchain that is controlled by a certain organization. Well, typically, when you think about a blockchain, you think of it as open source, not for Horizon.
Another example of a permission blockchain is IBM’s Hyper Ledger Fabric blockchain used by various huge organizations like Microsoft and Amazon.
Permissionless Blockchain — This is Ethereum, Bitcoin, Solana, Polygon among other open-source blockchain projects that are not controlled by any one in particular but open to everyone with the internet. Usually run under DAOs.
Blockchain Finance Use Cases
When you think about application of Blockchain financial systems, things like DeFi allowing trading crypto for cross border money transfers comes in mind.
Crypto-Exchanges — Coinbase, and Binance crypto-exchanges have enabled anyone from anywhere to be able to buy cryptocurrency using Mobile money. Like in Uganda, and around Africa, ChipperCash advertises as the app for buying stokes and crypto.
Venture Capital — Many startups have been able to get capital and funding through Venture capital firms and crowdfunding through Initial Coin Offering (ICO). For example, Ethereum was born out of an ICO where Vitallik Butterlin collected over $18 million from venture capitalists like Joe Lubin (Investor from Canada), and an investment in the Ethereum Foundation in 2014.
Trade Finance & Supply Chain — Imagine cryptocurrencies are accepted as legal tender in all countries in Africa, the United States, and the rest of Europe. Would you still be using any financial institution to facilitate your transactions? Leave your answer in the comments.
Digital IDs and Data reporting — You can use NFTs (Non-fungible tokens) to own your gaming assets like Avatars, weapons, among others. This concept can be used in real estate to create an immutable record of Land owners. The same technology can be applied in create Digital IDs by governments. Which can mitigate forgery.
GameFi — GameFi refers to play-to-earn blockchain games. In play to earn games, players can earn cryptocurrency and NFT rewards by completing tasks, battling other players, and progressing through the different game levels. Unlike traditional video games, most blockchain games let players buy and sell game assets like weapons, avatars, clothing, or rent them.
Let’s end this post by talking about Bitcoin Mining.
What is Bitcoin Mining?
Bitcoin mining is the process through which new Bitcoin comes into existence. It is achieved through a consensus mechanism known as Proof-of-work. Proof-of-work means the use of a computer to solve a cryptographic puzzle and validate a record (block) or new transactions on the blockchain.
There are various consensus mechanisms and proof-of-work is one of them. Proof-of-stake is another consensus mechanism used in other blockchains like Ethereum 2.0, Solana, among others.
There is also Proof-of-burn, proof-of-activity, and proof-of-capacity or storage, among others.
How to Mine Bitcoin at Home
You can start mining by owning a fairly strong computer or graphics card and fairly cheap electricity. Some cryptocurrencies like Litecoin (LTC), and Ethereum (ETH) cryptocurrency can be mined using simple graphics cards like NVidia or AMD Radeon.
Now you can buy a bitcoin mining machine known as ASIC Miner by Bitfury or Bitmain and set up your own Bitcoin mining rig to start earning cryptocurrency through a mining pool via Binance, or NiceHash.
The technical terms you might want to understand include Hashrate generated by a Hash function, and for Bitcoin it’s the SHA256 hash function.
Keep in mind that the Bitcoin mining process difficulty will increase every 210,000 blocks created on the blockchain. This is also known as halving.
For every block solved, a new bitcoin is created and this freshly mined bitcoin is referred to as a Coinbase. Not to be confused with the Coinbase App.
Blcockchain first of all provides a very important alternative (P2P Peer-to-peer money transfer) to traditional centralized money transfer finance system.
Cryptocurrency in Africa is growing at high speed, Blockchain technology like DAOs, DApps, and DeFi (Decentralized Finance), has been introduced and at least in some countries like Central African Republic, Bitcoin is a legal tender.
In other countries like Kenya, Nigeria, Zimbabwe, cryptocurrency and blockchain technology adoption remains high.
While in Sweden, their online payments are almost 100% digital.
In the United States, Bitpay allows you to buy Starbucks coffee with Bitcoin. This is because Bitpay is a regulated company and pays tax on all the bitcoin transactions and trading made.
Blockchain technology is what has made all this possible.
Who else can’t wait for when it’s finally legal buying and trading crypto in Uganda? Don’t forget to leave a comment and share this knowledge with other crypto enthusiasts.