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SOME DEFINITIONS

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Bitcoin, blockchains, and cryptocurrencies are fascinating to me
because there are so many elements to understand. This
multidisciplinary nature is one of the reasons I, and so many others,
love the industry—it is easy to get sucked into the rabbit hole, and as you
try to understand each element, every answer begets more questions.
The journey starts with ‘What is Bitcoin?’ but the explanations and
answers come from the disciplines of economics, law, computer science,
finance, civil society, history, geopolitics, and more. You could create a
pretty comprehensive high school curriculum around Bitcoin and have
plenty of material to spare.
And this is the very reason why it is so hard to explain. This book is an
attempt to cover the basics. It is aimed at the thinking person but
assumes that the reader doesn’t have a detailed background in the
various disciplines mentioned previously. Different people will find
different parts interesting. I try to use analogies where I think they help
explain some concepts, but be gentle with me: all analogies break down if
stretched too far. And although I have tried to be accurate, there will still
be oversimplifications, errors and omissions. What is true today may not
be tomorrow: the pace of change is rapid. I am the first to admit that
there are limits to my own technical expertise. Nevertheless, I hope that
every reader comes away learning something new.
With that, let’s start by defining at a basic level some of the words and
concepts we will be exploring later in the book.
Bitcoin1 and Ether are two of the better-known cryptocurrencies or coins
(note that the coin on the Ethereum network is called Ether, though is
often misnamed in the media as ‘Ethereum’). These are assets or items of
value that exist digitally, not physically, and are created by software. They
have no issuer as such. No person, company, or entity backs these, and
there are no terms of service or guarantees associated with them. Like
physical gold, cryptocurrencies simply exist, and are created or destroyed
according to the rules articulated in the code that creates and governs
them. If you own some cryptocurrency, and we’ll see what that actually
means later, it is your asset that you control. It has value, and can be
exchanged for other cryptocurrencies, US dollars, or other global
sovereign (or fiat) currencies. Its value is determined within marketplaces
called exchanges where buyers and sellers come together to trade at
mutually agreed prices.
As well as ‘coins,’ units of cryptocurrencies may be described as digital
assets. That is, unique data items whose ownership can be passed from
account to account. These accounts are technically called addresses, and
we will explore what addresses are later. When these digital assets move
from one account to another they are all recorded on their respective
transaction databases known, because of some unique shared
characteristics which we will look into later, as blockchains.
Just to confuse everybody, some digital assets are described as tokens, as
in ‘Is it a cryptocurrency or a token?’. Cryptocurrencies and tokens are
both types of cryptographically secured digital assets, sometimes known
as cryptoassets. These tokens have different characteristics from
cryptocurrencies and from each other. Tokens can be fungible (one token
being more or less replaceable by another), or non-fungible (where each
token represents something unique). Unlike cryptocurrencies, these
newer tokens are usually issued by known issuers who stand behind
them, and the tokens can represent legal agreements (like financial
assets), physical assets (like gold), or future access to products and
services.
Where the underlying item is an asset you could think of the token as a
digital version of a cloakroom ticket, issued by a cloakroom clerk and
redeemable for your coat. Indeed, these tokens are sometimes called
DDRs—Digital Depository Receipts. Where the underlying item is an
agreement, product or service, you can think of the token as something
like a concert ticket issued by a concert organiser and redeemable for
entry to a concert at a later date.
To give some real examples, there are tokens that represent everything
from gold bullion sitting in a vault somewhere2, through to tokens
representing unique ‘CryptoKitties’—collectable digital cats with specific
visual attributes determined by their ‘DNA’ code.
                                       

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What do all of these coins and tokens have in common? All transactions
related to them, including their creation, destruction, changes of
ownership, and other logic or future obligations, are recorded on
blockchains: replicated databases that act as the ultimate books and
records—the ‘golden source’ that represents the universal understanding
of the current status of all units of the digital asset.
Bitcoin’s blockchain is an ever-growing list of every Bitcoin transaction
that has ever happened, right from the creation of the very first Bitcoin on
3 January 2009, through to the most recent transfer or payment from
one account to another. Ethereum’s blockchain is a list of transactions
involving the cryptocurrency Ether, a multitude of other tokens
(including those representing CryptoKitties) and other related data, all of
which is recorded on Ethereum.
Different blockchains have different characteristics, so much so that
nowadays it is almost impossible to make a general statement about
‘blockchain’ without being wrong for some particular example. Some
blockchains, like the well-known Bitcoin and Ethereum chains, are
public, or permissionless, meaning that their list of transactions can be
written to by anyone, with no gatekeepers to approve or reject parties
who want to create blocks or participate in bookkeeping. Selfidentification
is not a requirement to create blocks or validate
transactions. Other blockchains can be private or permissioned, in that
there is a controlling party who allows participants to read or write to
them.
And finally, we need to distinguish between protocols, code, software,
transaction data, coins, and blockchains. Bitcoin is a bunch of protocols:
rules that define and characterise Bitcoin itself—what it is, how
ownership is represented and recorded, what constitutes a valid
transaction, how new participants can join the network of operators, how
participants should behave if they want to be kept up to date with the
latest transactions, and so on. These protocols, or rules, can be described
in English or any other human language, but are best articulated in
computer code, which in turn can be compiled into software—Bitcoin
software—that enacts those protocols, i.e. makes them operate. When the
software is run, Bitcoin coins are generated and can be sent from one
account to another. These actions are recorded as transaction data, and
this transaction data is bundled into bundles or blocks, and linked
together to form the Bitcoin blockchain.
So, to recap, Bitcoin protocols are written out as Bitcoin code which is
run as Bitcoin software which creates Bitcoin transactions containing
data about Bitcoin coins recorded on Bitcoin’s blockchain. Got it? Good.
Not all other cryptocurrencies or tokens work this way, but it is as good a
basis as any to start the journey.
Some people think of Bitcoin as the next evolution of money—it is
described as a (crypto) currency after all. So we need to understand a
little more about money. What is money? Has it always been the same?
How successful has money been? Are some forms of money better than
others? Can the nature of money ever change, or is what we have going to
be the same for evermore? Do cryptocurrencies sit easily alongside
today’s money, fulfilling a niche or purpose that existing forms of money
cannot serve, or are cryptocurrencies competitors to today’s money that
threaten the status quo of state-issued currency?
This book should give you a good well-rounded education into the basics
of bitcoins and blockchains and assumes no specific starting expertise.
We start by defining and understanding the nature of money. Then we
dive into digital money and how value is really transferred around the
world. We then explore a few key concepts from a branch of mathematics
called cryptography, so that we can then move to cryptocurrencies
themselves. In the cryptocurrencies section, we dive into the Bitcoin and
Ethereum networks, and the Bitcoin and Ether digital tokens—what they
are, how to buy, store, and sell them, how to explore their blockchains,
and the risks in managing them, including the unique challenges in
moving this new digital money around the world. Finally, we discuss the
types of blockchain technology that are being explored by banks and big
businesses to join up their databases and do more efficient business.
Although I have my personal biases and interests, throughout the book I
try to maintain a neutral position on the cryptocurrencies, tokens, and
blockchain platforms. I try not to neither over-sell them nor be overly
critical. I leave it up to readers to conclude for themselves whether these
technologies are a trend or a fad, useful or useless, good or bad.

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