Blockchain: the key to you understanding it
This disruptive technology is making great strides and many praise its multiple applications in different fields, from finance to medicine to the environment. These are the terms that you need to know to understand what people mean when they are talking about blockchain.
Languages grow, intermingle, change. The latest edition of the Dictionary of the Spanish language, published in 2014, contains over 93,000 words (5,000 more than the previous edition) and almost 200,000 definitions. The Oxford English Dictionary, the most comprehensive dictionary of the English language, has some 600,000 words, an increase of 1,400 on the previous revision. Globalization and the development of new technologies make it necessary to create new concepts and to give new meanings to existing ones.
One of the latest emerging technologies is blockchain. This term, which in itself may sound difficult to understand, is often not understood without a suitable context and background. It is becoming increasingly more fashionable and is capturing more headlines the need for a specific dictionary, and Blockchain España have set to work.
“As we are faced with something completely new, a new language is also created. Terms have to be coined and there needs to be agreement on what they mean”, explains the blockchain analyst and consultant Iñigo Molero, who is contributing to the project. These are the words that you need to know if you want to understand what buying cryptocurrencies and investing in Bitcoins is all about.
Before we begin: where has blockchain come from?
- The person (or people): Satoshi Nakamoto
Although their true identity is unknown, the creator or group of creators behind the origin of blockchain hides behind the name Satoshi Nakamoto. On 1st November 2008, Satoshi published a document that describes a system of digital money. In January of the following year they launched to the world the Bitcoin software or protocol and the first units of currency, called bitcoins. According to Molero, it did not arise from a preconceived idea; “Nakamoto’s great feat was to collect all public-key cryptography technology, RSA algorithms (cryptographic systems) and prime factorization, and condense it elegantly”.
- The aim: to stamp out double spending
Imagine you are selling a digital photograph and you send it by email. That asset remains on your computer, is also on the receiver’s computer, and may be on that of a third party who has hacked into the network. This is the problem of digital money: so-called double spending, the defect by which a single unit of digital currency can be spent more than once in a decentralized system. “This is Satoshi’s revolution: blockchain resolves something that it had not been possible to solve before now – such is its security and transparency that it eliminates the effect of double spending”, explains the project coordinator Beatriz Lizarraga, who adds: “With blockchain, when you send the image, it disappears from your computer and all its movements are shown”.
- The method: open source
Nakamoto chose this software development model, based on open collaboration, in which everyone can have free access to it. “This way of working has made blockchain a knowledge community that is generated continuously and is pooled”, praises Lizarraga.
- The key: decentralization
This is the defining characteristic of systems that do not depend on a central point for them to work. Molero highlights this blockchain keyword because “in decentralized models ideas flow, we are all connected, and it grants independence”.
The basic vocabulary
It is a distributed transactional database, made up of chains of blocks designed to not be modifiable once a data has been published, according to Blockchain Spain’s glossary. This technology decentralizes control and eliminates intermediaries like a book of accounts where the blocks (the corresponding records) interlock like a chain and protect the security and privacy of information using cryptography.
It is a digital means of exchange that is used in blockchainand that differs from traditional currencies and money in that it is not controlled by a central body, which means that it is decentralized. Litecoin, ether and bitcoin are cryptocurrencies.
The most famous cryptocurrency, the one that started it all. It is used in the digital system of the same name (in capital letters). As Molero explains it: “It is the first model using blockchain technology, intended to be a payment system without intermediaries”. Satoshi wanted a currency with the same characteristics as gold: that it was limited (there can be no more than 21 million bitcoins), not so easy to extract and that would maintain its value over time, or even be revalued.
One hundred millionth of a bitcoin.
It is an alternative currency (alternative coin) derived from bitcoin or other cryptocurrency.
This is a unit of value, a blockchain digital asset. Although it is sometimes used interchangeably, a token is not the same as a cryptocurrency: every cryptocurrency is a token, but not all tokens are cryptocurrencies. That is to say, cryptocurrency would be most similar to what we understand by coins or physical money (euros, dollars, coins themselves and banknotes), whilst token also encompasses other assets such as chips from the fair, gold bullion or financial assets.
Continuing the parallels between gold and bitcoin, miners are the nodes that validate transactions and create blocks in the system. After the mining process, they receive that blockchain’s cryptocurrency as a reward.
- Proof of Work
“This is the consensus mechanism of blockchain so that all users of the ecosystem agree that all transactions that have been collected are valid”, says Molero.
The economic revolution
This is the study of the creation of economic incentives, which are based on the creation of units of value on which self-governing business models are created. According to Lizarraga, this “allows you to distribute value completely openly and transparently, where trust and consensus play a fundamental role thanks to the blockchain’s inherent characteristics”.
- ICO (Initial Coin Offering)
“It is a new form of funding for developments of blockchain, a kind of crowdfunding in which a start-up issues its own currency and sells it to get funding and further develop their project. It has also democratized access to investment, because anyone can buy those cryptocurrencies”, indicates Molero. Since last year, they are the fashion in the technological investment world: the app Status raised 270 million dollars in less than three hours.
This is a kind of virtual wallet that allows you to save, send and receive cryptocurrencies, as if it were an account in a bank. This software stores the private passwords required to access cryptocurrencies; if you lose them, you lose the money.
- Smart contract
A computer program that acts as a contract and has the ability to be automatically fulfilled when both parties have agreed to the terms. It works on a chain of blocks in a decentralized manner.
This is the way in which smart contracts can act with data from outside the blockchain environment, for example, to join the chains of blocks with the Internet of Things (IoT) and other technologies.
The theory is clear. What about the practice? Lizarraga recommends that, if someone wants to truly understand blockchain “they have to play around – buy a very small amount of a cryptocurrency, try with Bitcoin or Ethereum, and get to know the experience”.
In any case, it will not be necessary to be an expert to be able to use blockchain, as has happened with other technologies. “For blockchain to go global it is not necessary for everyone to understand the most sophisticated concepts, it will be enough to understand the most basic ones”, indicates Molero. In the end, as the expert stresses, “when you are passionate about something and you see how interesting it is, you’ll always try to learn”.
Por Patricia Ruiz Guevara