"BlockChain" is a hype word and a sort of "myth" has been created around it, but in reality it is something quite simple and not really new as a concept.
What is "new" (ahem... since a few years at least) is the fact that it is applied to a digital currency.
I have been discussing this topic with few friends lately, so I thought some basic explanations might be generally useful since my impression is that most of the people thinks it is more complex than it actually is.
If you don't quite understand how it works, I will try to explain it in this post, in a way that should not assume any particular technical skills.
Ingredients : Blocks , hashcodes, wallets, distributed ledger
Let's start from the last one, the Distributed Ledger.
First off: it is a public ledger, imagine a spreadsheet with lines that record money movements from and to all the people (who use the cryptocurrency) in the world.
John gives Martha 0.001 coins , that's your first ledger entry, everybody can see it.
Now, how do we identify John and Martha? We give them an unique address, in the form of a long string such as xxo6YxxL19qs5JxxxxMaea4xxxxL55vmNr
That's my bitcoin receiving address (to which I replaced a few letters with "x" so that you don't send me money by mistake :) ).
The ledger is public, but the entities mentioned in it are only identified by an address (which somehow prevents governments to knock on your door asking taxes on them).
Why can't you simply get my bitcoins at my address? Well, turns out that my balance goes into a wallet, to open it you must be able to decrypt it with a proper key that I (and everybody else having a digital wallet) created.
Provided that balances can be attributed to a given address, only the person being able to open the associated wallet will be able to claim them.
There is a bit more to it, but let's leave it like that.
Since the ledger is distributed, many million copies exist, so the likelyhood of them being lost is pretty low.
Also this prevents people to spend coins they don't have as transactions are verified (if you are sending x coins, your running balance should be at least x) before inserting a block in the ledger.
Blocks :
instead of adding single rows to the ledger, like you would do in a spreadsheet, transactions are grouped in blocks, imagine a list of 20 spreadsheet rows.
The tricky part here is that the blocks are "chained" into the ledger, meaning to insert block n you need to know block n-1.
This is where hashcodes enter in the scene :
A hash is an algorithm that takes a bunch of data and outputs an identificative code for it.
This is a destructive transformation, meaning that you take the input data and you get a deterministic result (if you apply the same algorithm n times to the same input you always get the same result), BUT knowing the result does not allow you to compute the original data.
There are plenty of hashing algorithms, Bitcoin uses SHA-256 which outputs a 256 bit value (a 32 byte binary code).
You may have a block of 1Megabyte or 1Kilobyte worth of data, but their hash will always be 32 bytes.
Blocks, before the list of transactions, contain the hashcode of the previous block, this means that if any block is changed in the ledger, all the subsequent blocks will have a wrong hashcode, this prevents tampering with past transactions (and the resulting balances).
If you have hard time to visualize this process, just think about prime numbers : they are actually a chain since you cannot compute a nth number unless you know the n-1 ones.
At this point everything would be easy: get a new block of transactions, calculate the hashcode of the last block, add the value to the current block, append. Done.
Actually not quite, this is where mining becomes part of the game.
Calculating a SHA-256 hashcode is something that modern computers manage quite easily, but then there would be no effort to run the operation, therefore it would be impossible to attribute a reward to it.
To generate artificially an effort, a condition is added : the resulting hashcode must start with a given number of 0 bits.
This number varies and sets the "difficulty" of the mining for a particular currency. As computing power increases, so does the difficulty to avoid uncontrolled inflaction of rewarded values.
But we said that a given block of data can produce a single hash with a given algorithm, how can we ask it to start with a number of leading zeros?
We can't, this is why we change the data of the block, but we cannot change the transactions, so there is a field called "nonce" in the blocks, consisting of four bytes (32 bits) for us to change.
Altering the nonce field and computing the sha-256 hashcode until we get a "golden" hash (with the required leading zeros) is the mining process, it usually require many iterations.
Since it is impossible to start from a hash and get the input data, we have to run a loop with trial and error, until we find the desired hash.
Once the golden hash has been found, the "proof of work" is simply the nonce used to alter the data block. Everybody can verify the resulting hash conforms to the difficulty requirements.
When you hear about services, hardware etc that can generate a given number of hashes / second (aka hashrate : could be Mega hashes /s, Giga hashes /s, Tera hashes /s ) that's a measure of how many attemps per second that particular hardware or service is able to deliver.
I will not enter into technological or financial considerations here (maybe in a future post, who knows?), but I hope you understand the basic concept behind blockchain is quite simple... and probably that's the beauty of it.
P.S. : No, in general it is not worth mining currencies on your computer as an individual or as a part of a pool. Money can be made, but usually at a larger scale.
There are better options to gain money (like doing some actual work and getting paid for it :) ). Cloud mining can be an option too (major players are Genesis Mining and HashFlare) ,be aware that in general these are high risk investments.
I have a small investment with HashFlare, not really planning to make any money out of it, but that gives me the opportunity to experiment and better understand how the whole cryptocurrency marketplace works.
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