Digital Currency - Understanding Blockchain Network and Mining Process

Good Day! Hope you had a good reading on my previous article about Basics of Digital Currency. Now I would like to try to demystify Blockchain Networking and Mining Process which is apparently mandatory for understanding Cryptocurrency from Engineering & System Architecture perspective. This article deals with Blockchain Definitions, Digital Ledger and Mining Process.

Blockchain - Definition of Definition

Definition of Blockchain says that it is a distributed database that maintains a continuously growing list of ordered records called Blocks. Blockchain is also referred as a digital ledger in which transactions are recorded chronologically and publicly.

In general, we can store any transactions in Distributed Database if it is really necessary. What is transaction and why it is needed? The following are some examples of transactions.

• Withdrawing money from ATM
• Swiping your credit card in KFC
• Purchasing medicines in Apollo Pharmacy
• Claiming insurance for repairing your car
• Buying 500 AAPL stocks in your account

Do you understand why these transactions are stored or needed? Yes, it is essentially required for verification, validation and reconciliation.

Now we can move into understanding “Digital Ledger” concept. Archetypal meaning of Ledger is “A Place to Keep Something”. And, definition of ledger is an account to record, categorize and sort transactions, for maintaining the balance such as Asset, Liabilities, Revenue and Expenses to prepare Balance Sheet and Income Sheet. Digital Ledger is a database or electronic storage area where all records or transactions are stored in chronological order.

For reiterating the definition of Blockchain, it is a Digital Ledger where all transactions are electronically stored in chronological order; distributed in different locations with same transaction details called Blocks; continuously adding new transactions and available to public for processing transactions.

I hope that you have more idea on how Blockchain is organized. No?? Not Yet?? It’s Okay. I have given some usecases of Blockchain for various industries and it will help you to think through it.

Area	Usecase
Banking	Managing transactions and avoid data tampering from third-party requires advanced Business and Process solutions which can be easily solved by implementing Blockchain Network.
Trading	Distributed Ledger provides Investment Management, Order Execution Management and Clearing & Settlement Platforms to perform their Affirmation and Confirmation activities by using decentralized database to settle transactions safer.
Healthcare	Securely storing Medical Details and maintaining single version of Patient & Insurance Modules to avoid information conflicts.
Insurance	Fully automated and decentralized platforms allowing to invest in insurance and claim profits from insurance premiums as well as get insured.
Social Media	Sharing or broadcasting News or Blog and Running Reward Programs will require a decentralized ledger to manage the operations and services.

Miners - Digital Currency Engine

Now we jump into next tricky concept called “Mining” and players who are participating in mining activity called “Miners”. All Cryptocurrency transactions are intimated to all Blockchain Hosts (Also known as Miners) to validate and add the particular transaction in Digital Public Ledger (Blockchain Database) as a New Block (Transaction). One of the miners will process the transaction and update into Blockchain Network then broadcast the details to other Hosts for synchronizing transaction details. For this service, miners are rewarded with Cryptocurrency or some units of Cryptocurrency.

“Miners have a job and they are paid for that” Now you got this statement! Couple of questions must come to your mind and they can be one of the followings.

• Can anyone have the infrastructure of Blockchain Host?
• Can anyone participate to add Block into Ledger and get paid?
• If I have the complete access of Cryptocurrency transactions then I can hack the system. Can’t I?
• What will happen if all miners update a specific transaction at the same time?

Yes, anyone can have infrastructure of Blockchain and participate in adding Blocks in the network and get paid for that. There are some advanced algorithms and consensus mechanisms used in Blockchain Network to avoid concurrent update or duplicating Blocks. You can also tamper the data by hacking Blockchain Network but it is too costly.

How it is too costly because I already knew to verify the transaction as a Miner and it is very simple process.

Correct! You know how to validate transactions and add them into Blockchain Network so hacking must be simple. Yes, it is very simple but Not Easy! Have you heard about Hash? Yes, I mentioned in my last article that Hash is a type or method of Cryptography. All Cryptocurrency transactions are attached with Hashes which is known as Digital Fingerprint and then Miners have to decode or find the Target Hash (Matching Key) for validating and processing transactions.

Hashes! Does it really complicate? Yes, it is artificially complicated.

Target Hash for Digital Fingerprint (Hash) which is associated with the Cryptocurrency transaction should be identified by Miners. Target Hash is just like a random number (Nonce) by which Miners can process the transaction and add new Block.

How do Miners find the Target Hashes? As a miner, you have to either solve a Puzzle or win in a Lottery System to identify the Target Hash. Is it a difficult work? Yes, I told you already that it is artificially complicated in which miners require more effort and energy to find Target Hash.

Miners are rewarded with some units of Cryptocurrency for the time, effort and energy spent for Lottery System or Puzzle solving process for adding new Block. Miners can also make considerable amount of profit from the reward. If a miner wants to hack the system and tamper the previous transactions then miner has to put huge effort to find all Target Hashes in the ledger until the desired Block or Transaction comes. Do you know why? because all blocks are logically linked in Blockchain Network. Moreover tampered information cannot be updated to all other distributed databases without other Blockchain Host’s knowledge. This artificial complexity is considered as a main advantage of Blockchain which is the combination of Digital Ledger, Digital Fingerprint and Distributed Database. 

Blockchain Networking

There are 6 Blockchain Hosts are available in different regions and they are working for same Cryptocurrency. Gopal in USA, has advanced and high processing Blockchain Host infrastructure and he is also known as the most rewarded Miner. The rest of the Miners have medium infrastructure for Blockchain Network. Why I am talking about Blockchain Infrastructure now! Coming to the point!

Gopal’s hash-rate is high. Wait! What is Hash-Rate? Gopal can process more Hashes compare to other Miners because of having advanced Blockchain Infrastructure. Hash-Rate is the computing power of Processing Number of Hashes per Second. Now you got why Gopal is the most rewarded miner. Yes, he processed more hashes which made him to add more Blocks in Network and get more rewards as Digital Currency. Other miners have decent hash-rate and get paid for their transactions processing over the Blockchain Network.

Yuvaraj is one of the skilled Miners and he would like to hack the Blockchain Network. Reason is to modify the Blocks and Transactions in the network and add more Digital Currency into his personal or favorite Wallet. For achieving his goal, Yuvaraj has to find all Target Hashes for each Block in the Digital Ledger and update all Blockchain Hosts with new Blocks. Technically it is possible but effort is very high. This effort is as high as upgrading Blockchain Host Infrastructure and process more transactions. There are many chances to lose his infrastructure effort and energy without getting paid.

From these two cases, you can get an idea that success rate of Miners is far better than Hackers in Blockchain Network due to artificially complicated process.

Conclusion

Blockchain is the decentralized database network which helps to maintain transactions safely and securely. Cryptography and Digital Ledger idea provide more security to the transactions which is almost impossible to modify or tamper. Lottery and Puzzle Solving mechanisms are designed to consume more energy from the miners to validate and process a Block. At last, combination of above creates a solid decentralized database for maintaining transactions for Cryptocurrency.

Thanks for reading my article. Your patience & time are much appreciated. Please shoot your queries and I will try to answer as soon as possible. Have a nice day!

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Digital Currency - All You Need To Know As A Beginner

Good Day! This article is structured to provide a kind of knowledge on Digital Currency or Cryptocurrency. My only assumption is that you have some basic knowledge on Security Trading and Products. We can recap our understanding on Money & Currency concepts for starting with this article, but for understanding Digital Currency, we must have high-level knowledge on Security Trading, Information Technology and Infrastructure Services.

INTRODUCTION

Money is anything which is accepted as medium of exchanging goods and services. Money can be largely categorized or grouped as the following.

Type of Money

• Commodity Money
• Fiat Money
• Fiduciary Money
• Commercial Bank Money

We don’t need to worry about these types and let’s jump into Currency. It is one of the systems of Money which is used as medium of exchange for common usage. Many types of currencies are available around the globe and it can also be largely categorized into Commodity Currency, Coins, Paper Money and Electronic Currency.

Right! We have come to our topic! Countries which are mainly dealing with Currency as medium of exchange must have Regulations and Regulatory Authorities to manage them. But Why! There are plenty of reasons and the most important is to keep the value by comparing other countries or currencies. In high-level, Regulatory Authorities have responsible for currency transactions, control over the banks, inflation monitoring and cash flow. In India, Reserve Bank of India (RBI) is responsible for those actions for Indian Rupee.

Points To Be Taken:

• Money/Currency is controlled by some authorities
• Physical/Electronic Currency flow is monitored and regulated
• Banks play major role on Money flow
• Money/Currency value is always compared

CRYPTOCURRENCY

It is the latest Money/Currency which does not require you to know anything about it for start-using like how you are now using your Credit Cards and Money Transfer Applications. If you really want to know what Cryptocurrency is & how it works, you should read about Digital Currency, Block Chain and Cryptography. 

Right! Let’s understand what Cryptocurrency is!

Cryptocurrency is one form of digital currency like Debit Cards, Credit Cards & Mobile Digital Wallets, where all transactions are recorded on a digital ledger called Blockchain, and every process or transaction is secured by cryptography which protects reading & understanding the digital transactions from public or third-party. Got it? I assume No! 

Unlike other Digital Currencies, Cryptocurrency only exists in Computers and it does not require a regulator or middle man to monitor the transactions. Then how client accounts are maintained and how transactions are secured! First, we should understand what Blockchain & Cryptography are, from common-man perspective.

Get Into Information Technology

Have you seen Blockchain video? No! Okay! Blockchain is an advanced Information Technology concept which can also be referred as Digital Ledger Book. Ah Wait! Digital Ledger Book & Decentralized! What does it mean!!

Account Balance and Transaction Details of Cryptocurrency user is stored and maintained in various electronic Blockchain host around the world. All Blockchain hosts are synchronized with same transaction details on every Cryptocurrency transaction made. Just imagine how efficient the communication would be! It is the biggest opportunity for Information Technology Service Providers to deal with Cryptography and Blockchain. Miners (We don’t worry about them now) keep adding Blocks for each transaction and get paid for their service.

Adding new Block concept for each transaction creates complexity to the hackers & thieves to steal digital currency. Don’t believe me! It’s quite simple. To make it more complex, this is the right time to read about Cryptography, an ancient encryption and decryption technique for secured communication.

If you say Blockchain is the back-bone of Cryptocurrency, then Cryptography is the brain. I don’t want to discuss other organs in this article. Let's take Hash which is one of the cryptography methods known as One-Way Cryptographic Codes used by major Digital Currencies. Core idea of Hash is "Easy to compute one-way but hard to compute other-way". If I give this example, you will understand about “Hash”.

“Creating Complex Password for your Google Mail is so easy to you but it is very difficult to hack your Gmail Account” Right! “Simple Passwords can be created easily and hacked easily”. Do you believe in that? Good! It is the Hash technique. Here, third-party cannot decode the encrypted transaction which is associated or coupled with Block. Finally, I related Blockchain and Cryptography.

Now you may agree with the followings

• Cryptocurrency is available only in digital format
• Transactions are safe & secure even there is no regulatory authority
• Many Blockchain hosts are maintaining Customer Accounts and Transaction Ledger
• All transactions are added as Blocks with Hashes

How Cryptocurrency Works?

• User must have an account with Cryptocurrency Provider
• User can login into Wallet and transfer Cryptocurrency to other peers
• Transaction details will be sent to all Cryptocurrency Hosts / Blockchain Hosters
• Miners (Don’t Worry About This Term Now) add this transaction as Block in Ledger along with Hash
• Transaction Blocks are broadcast to other Hosts and Cryptocurrency Amount is settled

Quite Simple! Quite Easy! Information Technology Works Here!!

Advantages

• Transferring one account to another account without Bank or Clearing House
• Lower Account Management and Transaction Fee
• Cryptocurrency can be used in every country
• Digital Currency Account cannot be closed or frozen by anyone
• There are no transaction limits

Limitations

• In current situation, Cryptocurrency is so volatile and uncertain
• Still many corporate are not accepting Cryptocurrency as medium of exchange

WORKFLOW OF CRYPTOCURRENCY

How Can I Get Cryptocurrency?

Cryptocurrency is one of the currencies which is only available in digital form. Again I am telling the old story! There is a reason behind it! How you can get US Dollars if you are in India. Yeah! You can get paid for selling your good or service in the form of Cryptocurrency. You can trade your good or service against Cryptocurrency. And you can buy Cryptocurrency by trading your currency. Now you have Cryptocurrency in your Wallet. Got It!

Cryptocurrency Exchanges

There are Digital Currency Providers (DCP) who are directly connected with Digital Currency Exchanges (DCE) to facilitate Cryptocurrency trading and settling. DCEs are typically running with matching algorithms like other Security Exchanges and Commodity Exchanges. There are many Independent Cryptocurrency Exchanges which are not linked with DCPs however they allow customers to trade Cryptocurrencies or Digital Currencies for their Assets, Fiat Currency and other Digital Currencies. The following are the top list of DCPs which are operating in different countries.

• Bitstamp
• Bitfinex
• Coinbase
• Cryptsy 

These exchanges offer their client to Buy or Sell Cryptocurrency in their platform along with Marginal Trading, Short-Selling and Swap features.

Top Cryptocurrencies

We have almost covered all basics of Cryptocurrency and how they are secured and used by the stakeholders. Now I will list few popular Cryptocurrencies which have higher trade volume in the DCEs.

• Bitcoin
• Ethereum
• Ripple
• Litecoin

Bitcoin is very popular because it provides ATM facility around the world to withdraw local currency from Cryptocurrency. Each Cryptocurrency has its own pros and cons like Easy to liquidate, Accepting Stores are high, More Secure & High volatility. In trading and Investment Article, we will see more details about these coins.

GENERAL CRITICS & THOUGHTS

Most of the criticisms come forward because of not believing this new digital currency transaction model without any regulatory. Yes! It is still tricky! From my perspective, it is a usual fear as how people did not believe on Paper Currency Note, Derivative Contracts and Index Funds when they were released. But I think that regulation can also be considered or required to control the volatility and security. You can see the top list of criticism below.

• How Cryptocurrency is backed? What would happen if the value is lost?
• Will government try to kill Cryptocurrency?
• What will happen if users do not show interest on Cryptocurrency?
• Why Cryptocurrency cannot be taken for Regulations?

It’s fine because I don’t need to lose my money by entering in Cryptocurrency world without proper analysis. See the video what experts think about this!

What do you think? Are you with Warren Buffett?

I am definitely Not with him. As a successful investor, he is correct. I am a technology guy who knows to adapt with rapid changes so I believe that Cryptocurrency will create big impact in our traditional fund transaction world. It may not be Bitcoin or Ripple but it will be Cryptocurrency.

CONCLUSION

Thanks for reading my article and I appreciate your patience & interest. Feel free to post your queries. I remember that I have skipped few concepts purposefully to avoid over-dose while trying to understand basics. I have planned to provide two more articles in Digital Currency to explain about “Information Technology Requirements” and “Investment/Trading Techniques”. I will cover those skipped concepts then you can connect all dots.

References

https://cryptocurrencyfacts.com/

https://www.bitdegree.org/tutorials/types-of-cryptocurrency/

https://www.weusecoins.com/

https://www.investopedia.com

https://quickonomics.com

https://coinpupil.com

https://www.bloomberg.com

http://bitcoindifficulty.com

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