Blockchain Basics: Intro and Concepts#

• We will start with simple examples to introduce the technology and the way it works
• Then we’ll explain what the important concepts are – what makes the technology so powerful
• …and only then we’ll get into complex stuff required to understand what goes on under the hood

Consider an example:

Wallets#

• Remember how Bitcoin is a network?
• All the kids with their Venmo apps are now nodes in that network
• Specifically, these nodes are known as digital wallets
• Wallets are a lot like bank accounts
  • You keep your money (digital currency, tokens) in them
  • You send/receive tokens from/into them
• The network knows the wallets by their IDs (just a long text string)

A Word on Exchanges#

• In real markets and cryptocurrency markets, exchanges are companies that perform buying and selling of stocks or currencies
• If you saw a “Currency Exchange” kiosk at an airport – that’s a little exchange
• It holds cash in many currencies
• It buys currency from you at a lower rate and then sells it to someone else at a higher rate and makes profit
• Stock markets do this as well, just at a much higher scale

Buying Bitcoin into Venmo#

• Venmo holds your wallet and Venmo is connected to your bank account
• Venmo also acts as an exchange broker
• The first thing you do in the app is press “Buy Crypto”
• …and then Venmo will do the following:
  • Connect to one of many exchanges operating in the Bitcoin network (Paxos)
  • Conduct the transaction on your behalf
    • Find another wallet (through an exchange) that transfers its Bitcoins to your wallet
    • Take some dollars from your bank account and send to that exchange (which will later send it to whoever > sold bitcoins to you)

Can It Be Done Differently?#

• Yes, it can
• When cryptocurrencies just started, people used USB-sticks with their digital wallets and had to know their counterparties (people to sell to or buy from)
  • Knowing a counterparty is knowing their wallet’s network address
• This was a pure peer-to-peer setup – no exchanges, no banks
• It guaranteed anonymity, which is helpful for all kinds of shady activity
  • The only information that was public is that a wallet with ID1 moved some coins to a wallet with ID2
• This option is still available, but most people use bank-linked apps and trade through exchanges – because it is much easier than going hard-core
• Digital wallets managed by services like Venmo or other digital currency exchanges are called “custodial” wallets – meaning someone has custody of your stuff

Summary#

• Blockchain is a P2P network technology
• Bitcoin is just one of many blockchain networks
• Nodes are digital wallets
• In the “pure” model, it is a decentralized anonymous system
• In reality, most people use centrally owned services (banks, apps, exchanges) to transact in Bitcoin