Block By Block (0): Where to start when you want to learn about blockchain

This is a series where I try to share some of the fundamental elements/ issues I think we should learn about when stepping into the fascinating world of blockchain.

But first, let’s talk about why I think we should understand the technology or mechanism behind cryptocurrency.

1. Long term profitabilityAlthough we all see the crazy bullish market earlier this year where many projects experienced the sweet multiples, we also see some projects fell far far away from their all-time highs. I believe this is not the last bullish run, but I also believe we need to identify the value of a project. That is, know what projects to trade and know what projects to hold. In my opinion, this is the better way to ensure long term profitability.
2. Lower risk of being scam

   There’re thousands of cryptocurrencies. 

   Many of them are scams or something that don’t have fundamental value or utilities. While many memecoin or shitcoin “maybe” have the value to trade, they are most likely not fit for hold. It is important to know what are you holding or what are you investing in.
3. Identify promising projects earlierIt is promising to invest in the established cryptocurrencies like Ethereum. However, the multiple for these projects are not going to be as high as the promising projects that came out just for a couple years. How to identify these projects and invest in them, even maybe participate in their IDOs, are keys to get a higher multiple by just holding the tokens/coins.

So, how do we start to learn about blockchain? let’s start by a simple question:

What is blockchain?

Blockchain is a special kind of database. The key difference between the usual database is that blockchain is a distributed database. This means that the data held by a blockchain is spread out among different nodes in the network, instead of in a company’s server facility. It prevents the problem of single point of failure, and malicious behaviors that want to alter the data. (We will talk about the mechanism later).

Let’s see how blockchains work by assuming a blockchain that is used to store transaction records. When a new transaction takes place, this transaction is sent to the network of nodes to be verify and stored. Once the transaction is confirmed to be true, this information is then stored into a “block”. A block is a cluster of data, which is accumulated for a specific time period. Once a block is filled, it is appended to a “chain” of blocks, thus the name of “blockchain”.

Once the blocks are appended into the blockchain, it can not be edited or destroyed. Each block is given the a timestamp, it is a history of data, i.e. a history of transactions.

Each blockchain has its design of how to verify the data, as well as the time period for each block, other security measures and other attributes. However, at its core. A blockchain is a database that is a chain of data clusters, which has a distributed nature.

How does a blockchain verify a transaction? A brief intro to PoW

The mechanism which a blockchain verifies a transaction is called a “consensus mechanism”. Now, there are many different kinds of consensus mechanism. Perhaps the most well-known one is called proof of work, or PoW in short.

Bitcoin, the “OG” blockchain concept is an example of this consensus mechanism. The transaction is verified by the nodes solving a “math problem”. But what is this math problem exactly? The algorithm that a bitcoin node solves is called “SHA-256”. It is a hash function that takes a certain amount of data and calculate their unique “fingerprint” that is 32 bit long.

When a node calculates a block, it takes all the transactions that happened after the last block as well as the transactions that didn’t fit into the last block, plus a made-up random number in to the hash function and see if the fingerprint calculated is smaller or bigger than the a certain number decided by the bitcoin network.

If the calculated number is smaller than the decided number, then the node has created a valid block, and will be given reward for it if the node is one of the first to do so. If the calculated number is bigger than the decided number, then the node has to re-assign a random number (which is called nonce) until it gets it right.

This process takes a huge amount of computing power. Thus, to record a malicious transaction into the blockchain will require you to calculate this problem faster than most of the network, which is impractical and uneconomical.

In the articles to come in this series, I will continue to talk about how other consensus mechanism and how DeFi projects or any other projects utilize the blockchain technology.

You can start to learn about blockchain by studying how they implement the functions that they want to do, and whether or not it is logical. I also do many project highlights besides the Block By Block series, which introduce the mechanism behind different projects. By doing our research, we are all gonna make it, WAGMI!

Disclaimer: None of the above information or the content in this medium blog constitutes of a recommendation to buy/sell any cryptocurrency or any security. This is not a financial advice. You should always do your own research.

Clement Chen

I am a blockchain enthusiast now working in crypto VC with previous experiences in business consulting, trading and algorithmic trading strategy engineering.