Blockchain for Beginners

How the technology behind bitcoin works. Understa

Introduction
I want to thank you and congratulate you for downloading the book, “ Blockchain For Beginners ” .
This book has lots of eye opening information that will help you to understand the blockchain
technology and how it is shaping the world.
The future of money looks just as exciting as its past. However, if what is happening today is any
indicator, unlike its past, a past full of cowry shells, barter trade, and other such currencies, the future
of money is about to have some very relevant technological upheavals that shall change how we
conduct interpersonal business and how businesses and corporations conduct business.
If you do not adopt to the impending changes, if you fail to learn how technology is influencing the
future of money and how we shall view person-to-person or business-to-business money transfers in
the future, when technology comes full swing and we finally lay to bed cold hard cash, credit and
debit cards, you will struggle to keep up.
Now is the best time to learn about the things happening now that will greatly influence the future of
money. Of the things you need to learn, key among them is the blockchain technology. What is
blockchain technology? How does it work?
The purpose of this book is to demystify this and much more about digital currencies and their
influence on the future of money. In this book, you will learn how money, as we know it has changed
over the centuries, the entry of cryptocurrencies and blockchain technology, how it all works and how
these technological milestones are shaping economies and the world at large.
Thanks again for downloading this book. I hope you enjoy it!
Ó Copyright 2017 by Hugo Oak - All rights reserved.
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Table of Contents
Blockchain for Beginners
How the technology behind bitcoin works. Understand how Blockchain is changing the future of mon
Introduction
Money: The Past, Present, and Future
Cryptocurrencies: Bitcoins & How They Work
What are Cryptocurrencies?
The Anatomy of Cryptocurrencies Such a Bitcoins
How Bitcoin Transactions Work
How to Store Bitcoins and Other Cryptocurrencies
How Bitcoin Mining Works
How the Blockchain Technology Is Changing the Future of Money, Economy, and Our World
Conclusion
Before we get to a point of discussing the blockchain technology and cryptocurrencies along with
how these are changing the world in different ways, let’s start by revisiting just how money, as we
know it has been evolving.
Money: The Past, Present, and Future
This section is going to be very short. It will give a chronological order of the past, present, and
future of money. This will give you some background on where we have come from, which shall help
you adequately prepare for the topics we shall discuss in the following sections of the guide:
The Past
Money, in one form or the other, has been an integral part of man’s life since the very beginning. In
the beginning, money, as we now know it, was not part of man’s life. Instead, for trade, man bartered
by swapping goods and services. For instance, if you had chicken but did not have pots to cook them
in, you and someone who had pots would strike a barter agreement where in exchange for some of
your chicken, you would get some pots.
While this system worked well for centuries, by glancing at the nature and setting of it, you can see
that the system was bound to fail at some point or the other simply because of one thing: the inequality
of the trade. Think of it this way. Could trading a cow for beans, albeit magical ones, amount to what
you would call a fair trade? The answer is no.
Because barter trade was not always fair and to some extent, finding someone to barter with at an
agreed upon, favorable rate, was not always easy, man found convenient alternatives such as shells,
beads, and much later, metal coins. That is how we started using money.
In terms of historical data, the earliest semblance of what we now know as money traces back 5,000
years ago to early Mesopotamia. To calculate taxes and fines, measure wages, and settle debts
between landowners and traders, the administrators of the royal palace standardized money as
weights of silver whose value depended on the government decree instead of the value of the money
itself. This standardization is very similar to the banknotes we have today.
You can check this infographic, which gives you a summary of the past of money.
From this past is how we got to the present and the future:
The Present and the Future
Today, barter trade is not as common as it was in yester years. Today, even though money does exist
in the form of cold hard cash (banknotes), most transactions happen through credit and debit cards.
Today, however, despite the fact that there are more than 609.8 million credit cards, money is starting
to take a form that for the last one or two decades, has been revolutionizing how we transact: digital
currencies, and cryptocurrencies.
While it may not appear so, virtual and digital currencies are not the same thing even though many
interchangeably use them.
In truth, virtual currencies, which are currencies held virtually, are digital currencies. This means
virtual currencies qualify as digital currencies but while currencies such as Bitcoins (we shall
discuss these shortly) are digital, they do not necessarily qualify as virtual currencies.
The term “digital currencies” means exactly what the name seems to suggest i.e. currencies that are
stored as well as transacted electronically. When thinking digital currencies, think of the likes of
PayPal (in truth, any money based in 1’s and 0’s—computer codes is a digital currency) and the likes
of E-gold, one of the first digital currencies.
Since we have digitized our word, we have also digitized our money, and although this means we can
transact easier and faster, most digital monies such as monies held in PayPal accounts are still
centralized, meaning such currencies are under the influence of monetary policies set by governments
across the world. Enter cryptocurrencies.
Cryptocurrencies: Bitcoins & How They Work
If you have not been living in some prehistoric cave secluded from the news, internet, print and online
media, and social media, something this book rightfully assumes you have not, you have heard, at
some point or the other, the term Cryptocurrency, or at the very least, Bitcoins.
Unfortunately, while the popularity of cryptocurrencies such as Bitcoins has grown, its understanding
has not followed suit and many common folk do not know what they are. Let us remedy that:
What are Cryptocurrencies?

This is where the future of money lies:

Cryptocurrencies, which is where Bitcoins, Litecoins, Ethereum and other popular coins (check
image above) fall, are a form on digital currency medium exchange similar to fiat currencies—which
are monies regulated by the government, which in essence, means paper money—only unlike fiat
currencies, cryptocurrencies are digital currencies that use cryptography to secure exchange of digital
units of decentralized monies.
This explanation may not be the easiest to decipher and because this guide promised to demystify
everything for you, let us take a closer look at cryptocurrencies only this time, we shall explain it in
the simplest terms possible:
A Simplistic Explanation
Imagine I just got paid and because you had asked me for a $1 loan, I give you my last dollar. In this
scenario, I shall place the dollar in your hands; you and I witnessed this and you can now touch the
dollar in your hands. To transfer the dollar from my hands to yours, we did not need a third party: I
just gave it to you and because I don’t have another dollar, I cannot give you another one.
Because the dollar is now yours, which means I cannot decide what to do with it, you can decide to
give it to a friend or even save it for later. This is the nature of most fiat currencies transacted in
person-to-person exchanges.
When talking about cryptocurrencies, this scenario takes an interesting twist.
Assume I have a digital coin that I then give to you (how kind of me ☺ ). How certain are you that the
coin is yours; after all, you cannot see or touch it? How do you know that, because it is digital, I did
not make copies of the coin, copies that I then sent to a couple of our friends or even kept some for
myself? What this illustrates is something scientists call the double-spending problem, something that
lacked a solution until cryptocurrencies developed ledgers:
Ledgers
In essence, cryptocurrencies are like the dollar I gave you earlier only that in this case, it is digital
and decentralized, and in the case of transfer, which instead of person-to-person transfer, happens
from peer-to-peer, confirmation of the process happens in a public ledger in a process called mining.
A ledger, in the case of cryptocurrencies, is a digital book that tracks and records all transactions. As
you can guess, without proper control mechanisms, anyone with access to this ledger can tweak it and
perhaps create additional digital coins at will.
To solve this, instead of having one person in charge of the ledger, cryptocurrencies such as Bitcoins
decentralize the ledger such that no one person is in control of the ledger and any transaction
conducted synchronizes on the devices of all users. This makes the system impossible to game.
Because such cryptocurrencies define the rules of the system from the beginning, and the codes and
rules are open to the scrutiny of all, anyone with the proper motivation can maintain, check, secure,
and improve upon it—the mining process—and in exchange, create some digital coins.
The Anatomy of Cryptocurrencies Such a Bitcoins
What makes cryptocurrencies so different from fiat currencies?
Adaptive Scaling
Most cryptocurrencies, with Bitcoin being a great example, have an element of adaptive scaling. This
means that when building these currencies, the creators put in place measures to ensure the currencies
will work on a small or large scale.
For instance, in Bitcoins, the mining of one transaction block happens every 10 minutes and after
mining 2016 blocks, which takes approximately 2 weeks, the algorithm automatically adjusts to make
mining harder or easier depending on the time it took to mine the 2016 blocks. For instance, if it took
10 days for the network to mine 2016 blocks, the algorithm would adjust by making mining difficult
and vice versa.
Another adaptive scaling measure is ensuring that overall, only a specific number of blocks can be
mined (this increases scarcity thus improving the value of individual units within the block), and as
miners continue mining, reducing the reward for mining.
Decentralized
We have mentioned this at various parts of the book. Unlike fiat currencies under the control of
governments, meaning a third party (normally the central bank) controls their regulation, the creation
of, entry, maintenance, and verification of Cryptocurrency transactions is open source, meaning it
relies on algorithms and peer-to-peer networks. This means no entity can control or manipulate the
currency. To verify transactions and the creation of new coins, cryptocurrencies use cryptographic
code.
Because such currencies are open source, anyone can join or use the network, and developers can
create APIs (Application Programming Interface) without having to pay a fee. This makes it possible,
because cryptocurrencies are digital, for programmers to create digital wallets you can use to store
your digital currency and transfer to other persons.
Proof of Work
All cryptocurrencies use something called a proof-of-work system. This system is a computational
puzzle, often hard-to-compute but easy-to-compute, whose work is to limit any form of exploitation of
mining.
As we can glimpse from this discussion, Cryptocurrency coins are publicly agreed on records of
ownership generated by miners. Miners, on the other hand, are individuals who through programs
running on specialized hardware/computers solve the proof-of-work puzzles that generate the coins,
and record transactions. The work that goes into mining these coins is what gives the coins value
while scarcity of the coins, which as we discussed earlier, depends on how long it takes to mine a
block, is what cause the value—value against other currencies such as the dollar—to
fluctuate/increase.

Now that we have looked at and demystified cryptocurrencies, you may be wondering, “How do
Bitcoin transactions work?” Let us look at that:
How Bitcoin Transactions Work
Bitcoins are the most popular cryptocurrencies. To use, transfer, or even store Bitcoins, you need a
Bitcoin wallet. When you have a Bitcoin transaction, everyone on the network knows about the
transaction—through the public ledger or blockchain—and because the ledger is open to scrutiny by
all, it is possible to trace the Bitcoins you send back to their point of origin.
The funny thing about how Bitcoins work is that in truth, Bitcoins are nonexistent: there are no
Bitcoins, just recorded Bitcoin transactions. When you compare this to holding dollars or pounds in
your hands, nowhere, even in a particular Bitcoin address, do Bitcoins exist and no one can point to a
file, digital or otherwise and say, “This is my Bitcoin.”
What we have instead is a record of transaction between different Bitcoin addresses; these
transactions have decreasing and increasing balances. As you now know, since Bitcoins (and in
extension, other cryptocurrencies) only exist in a public ledger—what we called a blockchain,
something we shall discuss shortly—to work out the balance in a certain Bitcoin address, you would
have to look at, and reconstruct the blockchain: tedious work.
Any transaction sent within the Bitcoin system has 3 pieces of information:
1. The Input: The input is the record of the Bitcoin address a Bitcoin transaction came from
2. The Amount: The amount is the amount of Bitcoins transacted
3. The Output: This is the recipient’s Bitcoin address.
Sending or receiving Bitcoins requires two things: a Bitcoin address and a private key. The Bitcoin
address, a sequential combination of letters and numbers, is random and often comes with your
wallet. The private key, on the other hand, while also a sequence of numbers and letters, is private.
Your Bitcoin address is much like a translucent safe only accessible through the private key. To send
Bitcoins to someone, you use the private key to sign a message with the input, the amount, and the
output. When you send these coins, you are doing so from your wallet and into the Bitcoin network
where miners will verify the transaction, place it the ledger, and because this transaction shall form
part of the computational puzzle that leads to unlocking new block chains, solve it and in so doing,
create new coins. This means that while transactions are often very fast, it may take a while for
transactions to clear as miners go about verifying all transactions in a block (it should not take more
than 10 minutes, which as stated earlier, is the time it takes to mine a block).
Let us take a brief moment to discuss how to store Bitcoins before we continue with the discussion
above:
How to Store Bitcoins and Other Cryptocurrencies
When you have fiat currencies, you can store them in your wallet, at a bank, or even under the
mattress if you so wish. When it comes to storing cryptocurrencies, while we have touched on Bitcoin
wallets, which is what you use to store cryptocurrencies such as Bitcoin, we have not fully-fleshed
this, which is not good because they are a few things you need to know about Bitcoin storage.
When you have Bitcoins, you store them in a wallet, which put simply, is an address on the
blockchain. Each Bitcoin wallet has two keys: a private key, which we discussed earlier, and a
public key. The public keys is the address those intending to send Bitcoins to you shall use while as
indicated earlier, the private key is much like a password to the safe that has your funds. If you
expose your private key, you may be the victim of a hack and lose all your money:

Now that we are talking about wallets, let us talk about the various wallet options at your disposal:
1. Online Wallet: An online wallet is the easiest way to store your Bitcoin. Here is a list of online
Bitcoin wallets to choose from. That said, because the online space is prone to hacking, online
wallets may not be the most secure or ideal for long-term storage for your Bitcoins.
2. Mobile Wallet: A mobile wallet is a bit more secure than an online wallet as long as no one
hacks your phone or your phone breaks (if any of these happens, your coins will be no more). For
this option, you can download any of these mobile wallets for your iOS device.
3. A Desktop Wallet: This wallet is similar to the mobile wallet with the only difference being that
in this case, the wallet is for desktop computers. Here is a list of such wallets for your choosing.
4. Hardware Wallets: Hardware wallets are hardware devices specifically built to store
Cryptocurrency keys. Because they are electronic—most resemble a flash drive—while safer
than most of the other wallet we have discussed, they have their fair share of susceptibility. Here
is a list of various hardware wallets for your consideration.
5. Paper Wallet: Paper wallet, which is where you store your private keys on paper, are the most
secure from hacking. However, as is the case with most paper, you should store your paper wallet
in a secure place and instead of using print paper, use terraslate paper. Here are best practices for
paper wallet.
Having discussed this, let us continue with our earlier discussion:
In some instance, the input and output amount will not match. Because Bitcoins only exist as
transactions, your Bitcoin address may end up with different transactions because each transaction is
separate and the blockchain cannot combine the transactions to form one file for all the transactions.
In such a case, if you want to send a specific amount of Bitcoins, your wallet will attempt to use
transaction records that amount to the amount of dollars you want to send. If your transaction history
lacks the exact number of Bitcoins you want to send—perhaps you want to send 1.5 Bitcoins—and no
two transactions amount to the amount you want to send, since you cannot split a transaction into the
exact amount you want to send, you will have to transact the whole output. You will have to send one
of the incoming transaction specifying how much you want to send, and then your wallet will return
the excess to you as change.
For instance, if you send an incoming transaction of 2 Bitcoins, your wallet will create two output
amounts for the transaction: one output for the 1.5 Bitcoins you want to send, and 0.5 Bitcoins to
address the wallet (we are talking about an online or mobile wallet here) to hold the change.
You may also be wondering, “What about charges? Do I have to pay for these transactions?”
Transaction fees will vary depending on various factors. If a transaction has a portion not picked up
by the recipient or returned as change to the sender, it automatically becomes a transaction fee. This
fee goes to the miner who solves the transaction. Many are the instances where since miners are now
processing transactions at no fee, you will not pay a thing.
Another thing you should know is that you can send parts of a Bitcoin. A satoshi is 1/100,000,000 of a
Bitcoin. On the Bitcoin network, it is possible to transfer amounts as low as 5430 satoshis.
On several occasions throughout this book, we have mentioned Bitcoin mining. What we have not
done, however, is discuss how mining works. Let us do that now before we move on to discussing the
blockchain and its effect on the future of money, economies around the world, and world in general.
How Bitcoin Mining Works
In fiat currencies, when governments want to exercise fiscal prudence, they simply print more money.
In Bitcoin, printing of money is not possible and instead, computers around the world compete to
discover or mine Bitcoins. Here is how this happens:
When users within the Bitcoin network send transactions, the network collects all transactions made
within a period into a block, which is, essentially, a list of transactions. Miners then confirm those
results and write them to the ledger.
The ledger or blockchain contains a list of all transactions made between all Bitcoin addresses since
the inception of the Bitcoin network. Whenever miners create a new block of transactions, they add it
to the blockchain and everyone who participates in the Bitcoin network gets an updated copy of this
so they can know about all transactions happening within the Bitcoin Network.
Miners also perform the critical task of maintaining the integrity of the blockchain. After the creation
of a block of transactions, miners extract the information in the block and apply a mathematical
formula that turns it into a hash, a shorter random sequence of numbers. They then store the hash with
the block at the end of the blockchain.
Hashes ensure integrity of the Bitcoin system in that while it is possible to produce a hash from a
Bitcoin block, working out the data by looking at the hash is impossible and because each hash is
unique, changing a single character from a Bitcoin block will alter the entire hash.
To generate the hash, on top of the using the transactions in a block, miners also use the hash of the
block last stored on the blockchain. Because the creation of each block’s hash is somewhat dependent
on the hash of the block before it, this acts as a wax seal in that blocks confirm the legitimacy of the
block before them, which makes the block tamper proof.
If someone tried to fake a transaction by changing the a block already stored in a blockchain, the hash
of that block would change and if one of the miners checked the authenticity of the block by running
the hashing function, that miner would notice the difference in the new block and the block stored with
the blockchain.
Further, because the production of a hash is dependent on the hash of the block before it, tampering
with one block means all subsequent blocks will have flawed hashes with the process continuing
down the chain.
The work of miners is to seal off a block, which they do by competing against each other using
special hardware and software specifically designed for block mining. Whenever a miner
successfully creates a hash, he or she gets 25 Bitcoins, and because this update reflects on the
blockchain, everyone hears about it. This works as an incentive to keep recording transactions and
mining.
This, as you can see, means it is rather easy to produce a hash from a collection of data, something
computers are fairly good at. If mining were that simple, everyone would be doing it, which is why
the Bitcoin network makes hashing harder: it does so by introducing something called proof-of-work
(we discussed this in passing earlier).
The Bitcoin network/protocol does not accept any hash. The hash of a block has to look a certain way
and have a specific number of zeros at the start. It is impossible to tell the nature of a hash before its
production, and if a miner includes any new piece of data to the hash, the hash changes completely.
Now that we have understood everything cryptocurrencies and Bitcoins, let us look at how the
blockchain technology, the underlying technology behind most cryptocurrencies, is shaping the future
of money.
How the Blockchain Technology Is Changing the Future of Money,
Economy, and Our World
A blockchain is a decentralized or distributed ledger that stores records of digital transactions.
Contrary to the working modalities of a bank, government, or accountants who use a centralized
database, a blockchain/distributed ledger has replicated and distributed via the internet databases that
are visible for all within the network to see (this ties in with what we discussed in section 2). A
blockchain can be public, as is the case with Bitcoins, or they can be private like an intranet.
Since the blockchain is decentralized, open to the scrutiny of all within the network, and at the same
time cryptic, it has all the characteristics of a disruptive technology that promise to change how we
view and transact with money, how economies around the world operate, and even how the world
operates when it comes to transactions.
Here is how Bitcoins and the blockchain technology are going to change the world:
1: Programmable money
Have you ever given your child money and worried that he or she would use the money to buy
something other than the original intent—perhaps you give your teenage son money for lunch but
instead, he buys pot? If you have, you don’t have to worry about that anymore.
Bitcoins, and in extension, most monies using the blockchain technology, are programmable money
meaning you can program the purpose of the money and even things such as in which city or country
the money is used. You can program the currency to a specific use, perhaps buying textbooks, and
reject all other uses. While this is not very common, the blockchain protocol allows it and in the
future, you may see further exploitation of this.
2: Faster and Cheaper Money Transfer
The blockchain is the first decentralized form of currency. Today, the technology has become so
popular that banks and money transfer services are looking for ways through which they can exploit
these technologies.
Mainstream adaptation of blockchain technology and the transference of cryptocurrencies around the
world will disrupt services such as Western Union and because the blockchain technology offers
faster, secure, and minimal transaction charges, this technology is poised for a very disruptive takeoff
that will shift how we send money to each other and how economies function.
3: A Flourishing Business Environment
Various governmental institutions around the world are acknowledging Bitcoins for what they are,
new business opportunities that when well tapped and given governmental support, would translate
into jobs and industrial growth. Increased adaptation of this technology, which with the internet of
things, is where we are headed, will lead to bullish economic growth all round.
4: Intrinsic Value Appreciation
With inflation being on the increase in almost all parts of the world, banking fiat currencies in bank in
the hopes that you will draw interest is a foolhardy venture. The innate design of cryptocurrencies is
that with time, their value appreciates and as Bitcoins near their 21 million cap, you can bet that their
value shall soar unperturbed by inflation.
Think of it this way, if you had bought 1 BTC worth $15 in 2012, today, that same BTC (Bitcoin)
would be worth $1000. Do you think the same value would apply to the same amount banked?
In truth, application of the blockchain technology is largely in cryptocurrencies. In the future, you will
see this technology used on things such as smart contract, the management of patient health records,
electronic voting, etc.
This technology is poised to, like Uber or Airbnb, disrupt banking and financial institutions,
insurance, health care, academia, the public sector and all other sectors of the economy that rely on
intermediaries. As you can guess, this disruption shall cause immense transformation and with it, the
loss of jobs. While this may be so, like Ford’s assembly line, the disruption shall bring with it
positive benefits too.
For example, after the removal of the impediment banks place on the free flow of currency by
charging exuberant fees and inane regulatory requirements—in some jurisdictions, you cannot send a
specific amount of money—we shall witness a fluid flow of cash around the globe, which will lead to
improved global trade.
The blockchain will foster better, quicker, and frequent trade between people (because of the safety
of it and the low transaction charges), something that promises to decentralize, democratize, and
expand global financial systems thus offering people better payment systems and stronger protection
against frauds and exploitation.
Conclusion
We have come to the end of the book. Thank you for reading and congratulations for reading until the
end.
In just three short sections, this book has distilled everything you need to know about
cryptocurrencies, Bitcoins and how they work, and the blockchain and its effect on the future of
money. As you may have noticed, the blockchain technology is like a train that has left the station full
steam ahead: there is nothing stopping it and the best you can do is prepare for it by becoming an
early adopter.

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