Blockchain Guide

Starter Cryptocurrency Explaination

Output hash
e59dc5f6d20cf8b2fc370116316e958234d1d1703832abc8333c6550a56e8392

1
 Contents

Part 1 Introduction 3

Part 2 The transaction chain 4

Part 3 Secure Hashing Algorithm - 7

Part 4 Blocks and Blockchain 8

Part 5 Using the Bitcoin ecosystem 10

Part 6 Trading and investing in altcoins - 11

2
 1. Introduction

I explain how the blockchain functions in a way that is easy to understand. Dont skip
anything, because it all pieces together well at the end. This is the next step of the Internet, and you
can profit very well off of the emerging market. More importantly, decentralization is important to
secure individual security and privacy, to secure your freedom. Learning about the people and the new
technology involved, and knowing that centralized disasters like Facebook and such are on the
downfall makes me feel pretty good about the future. Now to get on with the guide...

Bitcoin came in as the first decentralized digital currency system, and offered a lot of things
that can take the power away from banking corporations and place the trust needed in digital
cryptography. Do you trust bankers, or code? Anyway, Bitcoin relies on a system called the blockchain,
which provides many of the essential services banking systems provide, without the frills. These
include:

Finite number of total issued coins similar to the gold standard

Relatively fast transaction times
Transaction validity is checked for all transactions, the validity checking process (mining)
includes incentive
Controlled new currency supply is built in to the code, new currency is steadily pumped in the
total supply until it eventually hits the limit number (21 million btc)
Super low transaction fees
Wallet address (similar to bank account) creation in seconds, not tied to your identity at all,
anyone can make an address

3
 2. The Transaction Chain

The blockchain is operating without a central authority. It is decentralized, similar to the

Bittorrent peer to peer network. The entire system revolves around a distributed ledger a list of all
transactions ever made that points every transaction validity all the way back to the very first
transaction. This ledger is held by every full node on the blockchain network. To understand this better,
first you need to understand the concept of the transaction chain illustrated below (fig 1).

In this example, we can confirm that Bob has $5 to give to Alice, because we can reference his
previous transactions and see that Bob has a balance of more or equal to $5. Since he has the required
balance to send $5 to Alice, this transaction can be verified. This transaction chain stretches all the way
down to the very first transaction from the genesis block. The transaction chain is one way the
blockchain is chained.

The chain is heavy duty because it is based on public and private key cryptography. The
public key is seen as the wallet address in Bitcoin, and you can share that with the public. The private
key is how you access your funds, and you must be sure that you keep it secret and hidden away.

4
 Lets work through an example, say Bob wants to send Alice 5 Bitcoins, how would that work
under the hood?

First, Alice sends Bob her public key, which is her wallet address. This can either be the address
in text, or in a QR code so its easier (fig 2).

Next, Bob fills out the transaction message with Alices public key, and the number of Bitcoins
to send. In this case, 5 Bitcoins. Bob must make sure he owns enough Bitcoins to fulfill the transaction,
or it will not be accepted by the network.

Once the transaction message is filled, Bob signs it with his private key, and broadcasts both
the transaction message and his public key to the network. Nodes on the network can use Bobs public
key to match the signature that Bob made with his private key. This proves that Bob is the true sender
of the transaction message (fig 3).

5
Remember that during this entire process, neither Bob or Alices private keys are revealed to
anyone.

Once the broadcast is completed, nodes on the network will verify with both Bobs public key,
and reference to the transaction chain. After a few confirmations, the Bitcoins Alice receives becomes
spendable.

6
 3. Secure Hashing Algorithm

Understanding how a block is constructed requires basic knowledge on how a hashing

algorithm works. Although it sounds very technical, I will keep it simple and focus on how it functions
and the concept.

The Hashing algorithm that Bitcoin uses is called SHA-256. It takes an input, and provides an
output that it always of the same length of characters, no matter what the input is. This algorithm is one
way, meaning that there is no way you can find an input from the output. I have two real outputs from
the inputs Hello World! and just the letter s using a SHA-256 hash calculator (fig 4).

Lets work through a concept, this will be important later:

Imagine I said to a group of people, the first person to find an input that provides an output
with the number 0 in the beginning wins $50!. What would they do? Theres no way to know how the
input will affect the output string. So they will have to just type random things into a SHA-256 hash
calculator until they find one that meets my requirements. The letter s just happens to be one of them,
there are more valid inputs. Only the first person to find a valid input wins my prize.

Finding that s input took me about a minute of random guessing. Guess my game was too
easy, how can I make the difficulty harder? I can say the winner has to find an output starting with 00,
or to make it even harder, 000. Changing the output requirement will change the average length of
time taken to find a valid input. This also depends on how many people are playing my game.

7
 4. Blocks and Blockchain

The ledger and the transaction chain isnt secure just by itself. It needs to have a time variable
to protect it from fraud such as double spending. Combining the SHA-256 and the guessing game I
mentioned earlier can segment the transaction chain into time defined chunks, and can also steadily
increase Bitcoin currency supply until the supply cap is reached. We can combine the transaction chain
and the SHA-256 to visualize a block like so (fig 5):

Here, we can call the input a block. It is split into 2 parts; a large data portion where a time
based chunk of the transaction chain can be stored, and a nonce, which is where the participants of my
guessing game can plug in random inputs to try and find an output hash that is valid under the
conditions I specified.

The guessing game I mentioned earlier is the general gist of how mining works. Miners try to
seal a block by allowing their computers to run all the time trying to find a nonce that provides an
output that is specified as valid. The miner that finds a fitting nonce is provided a reward by the Bitcoin
network, which a set amount of newly minted Bitcoin. The mining reward reduces over time as the
total circulated supply of Bitcoins reaches the total capped amount of 21mil Bitcoins.

Now you know the transaction chain and the idea of a block. We just add one more thing into
the input of the SHA-256 to form a blockchain; the hash of the block before it, containing a data
chunk of the transaction chain in a earlier point in time. These blocks are chained like so in sequential
time order (fig 6).

8
 This blockchain is what distributed on every node on the network. Everyone has a copy of it, it
contains the transaction chain (ledger) chained with time. Bitcoin has a target block time of 10 minutes,
meaning that it self regulates the hashing output requirements (ie, starting with 00 or 000)
depending on how many people are participating in mining so that on average there is a winner every
10 minutes. We can say with a steady block discovery, the Bitcoin network has a heartbeat it tries to
maintain. It is very secure, because if an attacker would need to outperform 51% of the entire mining
network in order to maliciously change the distributed ledger.

In all, this is what happens when you send a bitcoin to a friend:

- Ask friend for bitcoin wallet address (aka: public key)
- Specify amount to send (1 btc), pay small fee as incentive to verify and set your transaction in the
blockchain (less than USD$0.01, regardless of how much you are sending to your friend)
- Broadcast the transaction
- Your transaction is requested to be put in the most recent block that is being built, miners try and find
a valid hash for that block
- You can view number of confirmations on your wallet, after 6, they are valid and spendable by your
friend

I would argue that the current mainstream media hype of Bitcoin is misplaced, it should be on
the underlying technology of the blockchain. Bitcoin is only an extremely successful proof of concept
for the blockchain technology. The blockchain tech is not limited to use as a digital currency, as the
data portion of the blocks can contain anything, not just a transaction chain. This is where the world
of altcoins (alternative cryptocurrencies) comes in.

9
 5. Using the Bitcoin ecosystem

Getting a bitcoin wallet

You can be a full node, meaning that you download the entire blockchain (lots of disk space
needed) and support the network, or you can be a lite node, where you just reference another full nodes
blockchain so you dont need to download the entire thing.

Recommendations can be found here:

https://bitcoin.org/en/choose-your-wallet

I highly recommend saving a backup of your private key, because without it you cannot access your
funds. Generally I would stay away from online (virtual) wallets unless you trust them completely.

Fiat to cryptocurrency gateways

There are a couple ways to do this:

Online exchanges These exchanges provide the service of linking to your bank account and
converting funds to whatever cryptocurrency they offer. Usually its either Bitcoin or Ethereum. They
offer fair fees, but often they require you to upload identification. Most exchanges can be used to buy
and sell.

Bitcoin ATM These are physical machines that you can feed money into and let it scan your bitcoin
address to send to on your phone. You can find some in your area using this site:
https://coinatmradar.com/
Fees vary depending on area. The ATMs provide convenience and anonymity since you dont have to
provide any ID. Only some allow you to sell Bitcoins and receive cash, these are rare.

LocalBitcoins - https://localbitcoins.com/
Private dealers of Bitcoins. You find one in your area and work it out with them. Methods vary, and so
do the fees they take.

10
 6. Trading/investing in altcoins

Investing in essentially the next step of the Internet can net you more than a pretty penny. Once
you have found an appropriate fiat-crypto gateway, and own some bitcoins (or ethereum), you can
begin trading. Here are some of the platforms I use:

Poloniex Lots of volume, reputable coins are traded. Not as volatile as other markets
https://poloniex.com/

Bittrex Medium volume, with lots of underdog coins. My favorite market.

https://bittrex.com/

Cryptopia and Liqui.io Tiny volume, you can find unknown coins here. Sometimes I use this to trade
recently announced coins.
https://www.cryptopia.co.nz/
https://liqui.io/

All of these sites only require a valid email address to sign up and begin trading. I recommend
to enable 2FA (2 factor authentication). This adds an additional step in security, you will have to
download Google Authenticator on your phone for this to work.

Once youve signed up, you need to deposit your Bitcoins to the exchange. They should have a
deposit tab, with a listing of all the cryptocurrencies you can deposit/withdraw from. Search Bitcoin,
press the + button, and it should show the a wallet address. This address is another bitcoin wallet,
managed by the exchange so you can trade on their platform. Send whatever amount you want to start
trading with to the address, and wait until it becomes spendable.

Once it becomes spendable, you can begin trading on exchanges. I recommend familiarizing
yourself with how candlestick charts work, if you search BTCkyle on youtube he has a good video
series to get started.

The strategy I use to trade, is to just ignore the technical analysis and find cryptocurrencies that
have good technology behind them, with suitable use-cases. I find and read their whitepaper to try and
understand how it works, if I like the idea I invest and sit on my holdings for a while before I cash out.
You have to understand altcoin trading is very volatile, you can use that to your advantage, or you can
be punished severely if you are prone to trading emotionally. Its also not regulated well, you can find
pump and dump groups online that try to manipulate the market and essentially rob people. Karma
bites back so I suggest you stay away from that. Only trade what you are willing to lose, blockchain
technology is an emerging market, usually if you hold long enough you will see a net gain.

Another tip In my experience, altcoins that net me huge profits are the ones that have good
tech, and a good active community behind it. If you can join slack channels, I suggest you do. Often
you get insider advice or early announcements you can use to your advantage.

11
12