Recently we wrote what is bitcoin ,but today we tell more easily. So, blockchain technology, the underlying cryptocurrency bitcoin, has been attracting more and more people’s attention. However, in most cases this term is used as some kind of magic spell, as a result, it is only clear to a normal person that it is cool, but nothing else is clear.

In fact, there is no magic, of course – the technology is arranged beautifully, but it is not that complicated. Let’s try to explain how it all works, literally on our fingers – without complicated mathematical formulas and technical terms that only geeks understand. Ok, we can’t do without technical terms at all, but we’ll have to use a couple of them, so let’s start by explaining them in simple terms.

How digital signatures work

Everyone in the digital world can generate a “digital last name” and a “digital signature” (public and private key, respectively). “Surname” he shows everyone, but the signature is kept secret. Because of this:

- You can write messages, sign them and publish them on the Internet.
- Everyone around you can see that the message was written by the same person with a certain “last name” (it can be guessed from the “signature”).
- no one can forge such a message.
- one person can generate many different pairs of surnames and signatures – a kind of stage aliases – for different purposes.

## How convolution (hashing) works

For example, I wrote a “hello” message and want to give it to my friend. But I need to know if it got to the recipient unchanged. How do I do that? The easiest way is to ask to pass the message back and see if it has changed. Many people do this when they dictate numbers or email addresses over the phone.

If something goes wrong on the way back, we won’t be able to tell if the original message is okay. And it can be long: imagine if the message contains an HD video, we can’t send all those gigabytes back, can we? That’s why they do something else: they use the so-called convolution, aka “hash”, to confirm that the message arrived without any distortion.

**Let’s convolve the word “hello” into one number – for example, like this:**

- Give each letter a number (a=1… i=33), we get: 17 18 10 3 6 20.
- Multiply all numbers and we get 1,101,600. This is the simplest convolution, or hash.

Now after sending the main message, I just give my friend the convolution, too, so that he can make sure everything adds up.

But if the message on the way changed and turned, for example, into “preve”, the convolution will be different: 17*18*6*10*6*5 = 550 800. A friend waits for 1,101,600, but gets 550,800 – then he’ll complain, and we’ll both know something went wrong.

Note: along the way, the convolution can also be broken or tampered with. The convolution does not protect, unlike the signature – it only simplifies and speeds up the integrity check.

Another interesting fact is that if you swap the letters, the convolution will not change in our example, and this is a failure. Real life uses a much more complicated “multiplication” of letters, so that the result changes from any change in the message. Moreover, it becomes either unrealistic or very time-consuming to find another message with the same convolution. In these cases, the convolution is called “crypto-resistant”.

For example, when using the popular SHA-1 algorithm, designed specifically for making convolutions (already not cryptoproof enough, but let’s not talk about sad things), the hash of the word “hello” will look like this

e24505f94db2b5df4c7c2596b0788e720e073021

And the hash of the word “hello” will look like this:

229d0ee5aabf6af982cdc03a89a56160f1de0e4a

**Nothing in common, right? That’s how it’s meant to be.**

## Our goal is virtual money.

Well, that’s it, the hardest part is over, all that’s left is to make it cool based on these technologies.

Imagine, we have 30 children sitting in a school class, and they need their own toy money. But only to be virtual (just numbers on a piece of paper or on the Internet).

To do this, they write on the blackboard who has how much money initially, and add at the bottom who gave how much money to whom. They write it in their own handwriting and sign it so that no one can correct anything during the break. Even in this form the system works fine, but only until a strict teacher comes and erases everything from the blackboard saying, “I want to control the financial flows because I have power. And don’t buy drugs from each other.” Those money could be used with different sphere such as gambling. Read more about How to Gamble with Crypto in Online Bitcoin Casino.

Then the children begin to keep a financial journal in their rooms, each one keeping a notebook under the desk and constantly adding to it all the transactions of money exchange – transactions. But since it is not allowed to shout during the lesson, the children quietly pass notes to each other (this is the Internet). This is how “cryptocurrency” works in the first approximation.

## Problems

A pile of transactions combine into pages.

Now there are 30 transaction notes going around the classroom, and it is not clear whether the student has copied them into his notebook or not. What kind of notes everyone already has and they can be thrown out? How do you know if Vasya has 50 coins to pay or if he already gave them to someone else before, just Petya doesn’t know about it yet?

There is a solution: the children will not only exchange short notes with lines of individual transactions, but whole pages at once. Someone alone has accumulated a lot of lines, neatly wrote them all down, put the page number, counted the convolution of the previous page and wrote it down, too. And sent out a new page to the class.

Petya receives a page and checks that everything is correct: all the lines are written in correct handwriting, the page number is new, the fold of the previous page coincides with that on the new page. Also, each author of a line really has as much money as he or she wants to pass on. To do this, you have to reread the entire magazine and count all the money – sounds like a hassle, but if you outsource this to the computer, it works quickly and without problems.

In general, if everything adds up, Petya carefully rewrites a new page in his logbook and the transactions are acknowledged as completed. Individual transaction notes that have already been entered on the correct page, then you can not pass on, but simply throw away – and then send an already designed page.

If something goes wrong – someone does not have enough money, or the page number is strange, or the roll does not add up – then Petya throws out the whole suspicious page with the words: “This sucks”, and life goes on.

The whole of the numbered pages (blocks) is the blockchain. It’s simple, no magic.

## Graphomania

If everything is left to its own devices, then each student will start writing his or her own version of page 123. As a result, there will be 30 versions floating around the classroom, but how do you know which one is correct? To do this, we need to determine the order: the page is written only once every 10 minutes, so that it can be distributed to all participants in that time, and the author is chosen at random.

Bitcoin achieved this in the following way. We should ask all the students to do something useful – to solve randomly selected problems from the math book. Whoever solves his problem first collects all the notes that have already come to him, and begins to make a page. While someone else finishes his problem, the honors student’s page will go around the classroom, recognized by everyone, and everyone will start solving new problems, and so on.

It’s not terrible if the pages will be designed almost always by an excellent student. As long as someone is alone and at a normal speed. When there are too many students in class and the problems begin to be solved too quickly, you can go to the next chapter of the textbook.

But if it’s always-the best student Misha will be the only one to design pages, he may want to start rejecting all attempts to pass Vasya’s money to someone. In practice, in order to do that, one has to be an incredibly cool excellent student – to have computing power more than half of the total power of all bitcoin system participants (which means millions of computers all over the world). So, if Misha is able to do that (that is, invested that much computing power), then the petty cheating doesn’t make sense for him anymore.

And one more peculiarity. An excellent student writes on the page also the solution to the problem (and the problem is not really random, but related to the page itself). This is necessary so that a year later you can’t fake all the pages from 123rd to the current one – for such a fake, you would have to quickly solve a lot of zadachkas.

## Benefit

Thus, new correct pages appear almost uniformly in our journal.

- And all of this is independent of the number of participants.
- It doesn’t depend on any center. Can’t be covered up, can’t be faked – every participant can double-check everything.
- anonymous, provided that the “digital name” can not be calculated from the real. Imaginary Petya can always say that the purse with this surname belongs to him – if he really has a signature, he can pay with it. Linking the wallet to Petya in the real world, if Petya doesn’t want to, is quite difficult.
- No commission. That said, you can pay a little excellent, so that he recorded your transaction in a page faster, without queuing.
- You can not rewrite history, that is, it is impossible to cross out the transfer of money from Vasya to Petya. After all, each page refers to the previous one. If you change one (say, it is even accepted by all other participants), it will be necessary to rewrite all subsequent pages, and to do this solve problems, a lot of problems. And participants, in case of any doubt, trust the longest chain of pages.

If I’ve bribed more than half of the students, preferably excellent students, I can sit them down in a separate classroom and right now start writing an alternate history in which I allegedly didn’t give my money to anyone. And then go back to the general classroom and present a longer journal. This is the essence of the 51% attack-and we’ve already talked about why this is difficult to implement in practice in the example with the excellent student Misha.

## Where does the money come from?

Originally, bitcoin coins could have been distributed among the lucky people on the very first page. But that would have been completely unfair and pointless. To involve more participants agreed to distribute the money gradually: the one who, after solving the problem, makes out a new page, first line writes: “Credit me 50 coins from nowhere.

And all agreed in advance that the page is correct, only if it is 50, and that in a couple of years it will be exactly 25, and then the amount is reduced. As a result, the amount of money in the population is growing, but in general it is limited – in total there can be no more than 21 million bitcoins (to date, “released” about 15 million).

Due to this, there was a lot of willing to join the project early and get some money according to the “who got up first, you get the boot” principle. Because then they will be distributed in smaller quantities and to a greater number of people. And everyone is learning to solve those same problems faster.

And so a lot of people already have a lot of cryptocurrency. Now we announce that cryptocurrency is like shares of Future Money, and we start trading them on the exchange for real dollars. The market price is set. It grows, because there are a lot of people who want to touch the money of the future, and they give out 25 nickels every 10 minutes to someone for free, and it is necessary to solve problems – in general, it is easier to buy for many people.

## Critique

Now that the reader has it all figured out, a little biased personal opinion.

- Bitcoin is really innovative. The mysterious author (or a whole lodge of authors) essentially made everything cool the first time, and it even still works.
- Bitcoins are very useful for illegality. Buying guns, drugs, extortion, bribes is very handy because you can’t trace it and cover it up. Offline, you can just pay in cash, but online, traditional virtual money is controlled and not anonymous.
- For legal activities, however, distribution and anonymity are generally useless and even harmful. There is already Visa and MasterCard, bank transfers and PayPal/WebMoney/Yandex.Money. Yes, they have disadvantages, but that’s the cost of the other chips:

a) we pay a commission (especially for cross-border payments), that’s what we get service for;

b) transactions take a long time, but they are checked and can be revoked.

Yes, in bitcoin everything is usually cheaper and faster, but for that we burn a hell of a lot of electricity, duplicate information millions of times. If we gave it all to a notional centralized WebMoney, it would obviously be just as good.

- What bitcoins are particularly beloved for is that they grow in value. It is the kind of pyramid scheme that will blow bubbles over and over again. Humanity will no longer be able to lose interest in it completely, and the more interested, the greater the demand. That’s why many who have bought the coins start advertising “future money” to fuel interest and price. Demand clearly overtakes the supply of coins, and supply falls over time.

In a normal economy, the amount of money is regulated by the central bank to keep it in line with the amount of goods and services and to make it a little cheaper over time. Bitcoins are not normal – they are constantly and rapidly increasing in value, which means that it is not profitable to spend them on goods, it is profitable to spend rubles and dollars, and bitcoins are left for later (probably even forever).