The layman’s FAQs about digital tokens and blockchains
What is cryptocurrency, digital token, crypto-token?
A digital token or a crypto-token is a unique set of bytes ( combinations of 1’s and 0’s) produced by running a computer program. It has certain properties.
1. The total number of digital tokens issued until the current time `t’ is publicly known.
2.The total amount of currency that will get produced until colossus (i.e. end of the universe) is going to be limited. This means that in all of time only `Nmax’ units of currency are ever produced and until some random time `t’ , `n’ units have been produced.
3.This ’N’ is fixed and is a large number. For example for Bitcoin N = 41 Million, for Ethereum N = 100 Million.
4.Users can own crypto-tokens and store them through a variety of physical and digital methods.
What is meant by owning digital tokens?
A) Anyone in the world who can connect to a computer can technically own digital tokens or cryptocurrency.
Individuals can either purchase it from other individuals who own it by using government-issued currencies (otherwise known as fiat currency) e.g the US dollar, the Yuan, or the Euro or they can earn it through a process known as “mining” in which specialized (and often powerful, expensive) computers specialized programs run to serve some purpose on the network. In the case of Bitcoin, miners create and validate new transactions through the block creation process. In some other forms of cryptocurrencies, existing holdings are staked to serve some purpose on the network (e.g. staking their currency to validate other transactions)
B) Any individual can send either full units or partial units to anyone else at anytime, anywhere provided the receiver shares his address to the sender.
What is the blockchain?
The blockchain is a public record of information that:
1) stores all information pertaining to every transaction, about every unit of currency, that was ever produced by the program till time `t’ , and,
2) will perennially continue to record every transaction.
PS: In computing terms, the blockchain is a sequential state machine, that stores all transitions
What are the functions of the Blockchain i.e. why should we bother about this store of all transactions?
The blockchain is a very large book of account that efficiently and almost instantaneously records every transaction related to all produced (mined) tokens. i.e. every time sender A sends x$ worth of cryptocurrency to receiver B. Whenever a new transaction takes place the blockchain does the following:
a) validates and verifies whether the sender has enough balance in his account
b). Validates that A is sending x$ to only B and simultaneously not sending x$ to other individuals e.g. receiver C, receiver D or receiver E.
This is known as the double spending problem.
Why is it called the Blockchain?
Consider Blockchain B as a datastore with records of all transactions until time t. At t+ delta.t another block ‘C’ gets linked to the existing block `B’. This new block is a record of all transactions that happened in time delta.t.
This creates a chain of blocks with each block recording all transactions since the previous block’s creation and gets linked to the previous block through a series of cryptographic hash functions.