Blockchain is a system of recording transactions in many databases that are widespread on many computers, each of which contains identical records. This system is also known as distributed ledger . With this decentralized transaction record, it is almost impossible to hack or change unilaterally, without changing the majority of all databases.

Note these transactions are contained in blocks that are interconnected. If one block is full, the next block will be connected to the previous block. Transaction records that are contained in blocks that have been created, cannot be changed anymore – so the blockchain is often referred to as having immutable properties.

Comparison of Traditional Systems with Blockchain

I’m sure you can find many definitions of blockchain on the internet, so I will try to explain the meaning in my own way. Let’s compare the traditional system with the blockchain system.

1.Traditional System: Trust With Third Parties

Suppose you buy a cup of coffee at your favorite café at the Mall. When you pay, you swipe your credit card at the café card machine. Here happens a transfer of money from your account to the café account earlier. But how do you know that this transfer actually happened? Why does your café believe that your money has been transferred to their account? This is because there are third parties that are trusted by you and your café. In this case, the third party is your bank, or the card network that you use (Visa, MasterCard, or Amreican Express). Your café trusts third parties. But what will happen if your bank system, or your credit card network experiences technical problems or for example being hacked?

2. Blockchain System

Blockchain is a system that does not use these third parties. In essence, records of transactions that have occurred, are stored by many computers that are spread on the network itself. So it will be more difficult to hack a system of hundreds or thousands of computers, and it is unlikely that all of those computers will crash at the same time.

So, for example if you pay for your coffee using Bitcoin (a cryptocurrency), the Bitcoin for coffee payments is transferred from your Bitcoin address to your Bitcoin cafe address on a peer-to-peer basis. And this transaction will be recorded on all computers spread over the Bitcoin network. 

Cryptocurrency

You name it in this RT, all the residents like chocolate, so we willuse chocolate as the currency / money used here. 9 of these occupantswill work as accountants in the RT, and they will compete to get chocolate in return for their accountant jobs. In the world of blockchain and cryptocurrency, these 9 inhabitants are also referred to as Miner (miners) because they work to mine chocolate.

If there is a complex transaction calculation, for example the 15 houses in this RT all have lunch at a restaurant, and everyone orders different food so the payments are different, all 9 RT accountants willcompete to calculate the fastest transaction. Whoever finishes itthe earliest calculation, and can be confirmed by 8 other accountants that the calculations are correct, then he will given a chocolate gift. This is why the miners ideally have a strong and fast computer system.

However, aside from these 9 accountants, the other residents in this RT can also buy and sell chocolate itself, because this chocolate has value (there is supply and demand). And if this RT has new residents, demand for chocolatewill increase a lot, so the price of chocolate will go up because of higher demand while the amount of supply (or supply of chocolate) is fixed.

In the world of cryptocurrency, chocolate above is a parable of BitcoinEther (the currency used by the Ethereum blockchain), or other cryptocurrency.

The Characteristics of Blockchain that are important to be understood by Cryptocurrency investors

If you have read and understood the concept of blockchain in general above, here is a further explanation of blockchain from the cryptocurrency investor side.

1. Open-source and Transparent

It is important to understand that the blockchain code is transparent. If you are a developer who can read Blockchain code, you can verify the code yourself What written, for example in Bitcoin:

If you compare it to the common currency of a country (for example the US Dollar), which is usually controlled by a central bank (Federal Reserve in the United States), ordinary people like us don’t willnever know how much new money will be printed in the future, for example 10 years to come; Or what are the bank interest rates next year.With cryptocurrency, all of this can be verified in written code.

2. Decentralized/Not Centralized

Cryptocurrency is a scattered system, where no one person or one company controls it. The blockchain code is not located on a central server operated by a company, but is spread across thousands of computers on the blockchain network. You can have it too node itself, where your computer / machine contains blocks and transaction records of the blockchain.

3. Supply and Inflation Level Are Clear (Data Available)

Because the blockchain is transparent, we can know exactly how many cryptocurrency supplies there are and how many there are will printed in the future.

Why is Supply Important?

Everything in this world that can be sold and bought has a price. And the price of all things always depends on supply and demand (demand and supply).

Imagine if everyone in the world had an apple tree that could produce an unlimited number of apples, with good quality same. Then the price of appleswill to be very cheap and maybe even close to 0, because it’s useless you buy something that you can produce yourself whenever you want.

Another analogy: Imagine if the Ferrari car company only produced 10 Ferrari special editions in the world. You decide to buy one of these cars at a high price, because it is very exclusive. But in the next 5 years, it turns out that Ferrari decided to produce 10 thousand units of the car. How do you feel? And according to you, What will happen with the price of the special edition car?

The concept same with stock. To understand the price or value of a company, we need to understand the company’s market capitalization, which can be obtained from the number of shares multiplied by the share price. Future earnings and profit margins are also important, but this is a separate topic.

Bitcoin Supply and Inflation Rate

Let’s look at the amount of supply and the inflation rate of Bitcoin as an example. The chart below is based on the Bitcoin code, and candescribe exactly how much Bitcoin supply is will circulating in the future.


Bitcoin Supply and Inflation Rate

4. Immutable (Cannot be Canceled)

Whatever has happened and confirmed on the blockchain, cannot be undone. So if you have made a mistake in transferring fund you go to the wrong address, meaning your funds are gone – unless the owner of the recipient’s account is kind enough to return your funds. But it must be remembered, it is almost impossible to find out who owns a cryptocurrency address.

Of course there are exception cases on the blockchain where something can be undone. Examples occur in Ethereum. At that time, a person (or group) hackers steal fund A very large Ether from the DAO project (15% of all Ether in circulation). The inventors and developers of Ethereum did not allow this to happen and cancel the transaction with a hard fork which produced a new version of Ethereum.But the old version of Ethereum is still maintained by several miners. This old version is known asname Ethereum Classic.

5. It is almost impossible to be hacked

A good blockchain project, of course will supported by many miners / miners who helped to secure the blockchain network with the power of their machines / computers. Cryptocurrency mining is a very large separate business. The miners are rewarded with the cryptocurrency they mine.

In essence, the miners compete to complete a mathematical calculation. Anyone who succeeds in solving the calculation accurately and creates block new to the blockchain, will be rewarded. Therefore these miners dare to invest heavily to buy powerful computer equipment and also pay expensive electricity costs for their activities.

A note: The mining system above is for the blockchain system proof-of-work, like Bitcoin. Several types of blockchain (such as Ethereum in the futurewill come), use the system proof-of-stake – or virtual mining / virtual mining. This is a separate topic.

To be able to hack a blockchain, you must control more than half (> 50%) of the power of the computer that is involved in securing the blockchain network (known as name assault 51%).

You may have heard that a blockchain has been hacked before. These hacks generally occur on an exchange (like Mt.Gox), and smart contracts that have security weaknesses (like The DAO); and not on the blockchain itself.

To illustrate how difficult and expensive it is to control 51% power on a blockchain network, below is an example of mining activities carried out by companies and individuals.

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