INVESTING IN BITCOINS TRAINING

DAY 11

*DAY 11: THE BLOCKCHAIN (UNDERSTANDING BLOCKCHAIN)*

Hello members. Welcome to another day of our *INVESTING IN BITCOINS TRAINING*

This training has been brought to you by; Justine Nyachieo, Business Man & Mentor
(+254742304047) and Timothy Angwenyi, Business Consultant (+254701711058)

What is blockchain technology? What makes it so important?

Imagine a world where you can send money directly to someone without a bank – in seconds
instead of days, and you don’t pay exorbitant bank fees.

Or one where you store money in an online wallet not tied to a bank, meaning you are your
own bank and have complete control over your money. You don’t need a bank’s permission to
access or move it, and never have to worry about a third party taking it away, or a
government’s economic policy manipulating it.

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This is not a world of the future; it is a world that an avid but growing number of early adopters
live in right now. And these are just a few of the important blockchain technology use cases
that are transforming the way we trust and exchange value. We will get into the rest later on.

Yet, for many, blockchain technology is still a mysterious or even intimidating topic. Some even
remain skeptical that we will use this technology in the future. This skepticism that exists today
is understandable because we are still very early in the development and widespread adoption
of blockchain technology.

2021 is to blockchain while the late 1990s was to the internet. And like the internet, blockchain
technology is here to stay, and if you are reading this, you are early too.

This post demystifies blockchain technology. This is your ‘intro to blockchain technology 101’. A
complete, easy-to-understand, step by step beginner’s blockchain breakdown.

You will learn everything from what blockchain is and why it matters, to how blockchain works
(step by step) and what today and tomorrow’s most promising blockchain applications may be.

So let’s dive in

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*BLOCKCHAIN 101: BLOCKCHAIN FOR BEGINNERS*

Blockchain technology is the concept or protocol behind the running of the blockchain.
Blockchain technology makes cryptocurrencies like Bitcoin work just like the internet makes
email possible.

The blockchain is an immutable (unchangeable, meaning a transaction or file recorded cannot

be changed) distributed digital ledger (digital record of transactions or data stored in multiple
places on a computer network) with many use cases beyond cryptocurrencies.

Immutable and distributed are two fundamental blockchain properties. The immutability of the
ledger means you can always trust it to be accurate. Being distributed protects the blockchain
from network attacks.

Each transaction or record on the ledger is stored in a “block.” For example, blocks on the
Bitcoin blockchain consist of an average of more than 500 Bitcoin transactions.

The information contained in a block is dependent on and linked to the information in a

previous block and, over time, forms a chain of transactions. Hence the word blockchain.

*Types of Blockchains*

There are four types of blockchains:

*1. Public Blockchains*

Public blockchains are open, decentralized networks of computers accessible to anyone

wanting to request or validate a transaction (check for accuracy). Those (miners) who validate
transactions receive rewards.

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Public blockchains use proof-of-work or proof-of-stake consensus mechanisms (discussed later).
Two common examples of public blockchains include the Bitcoin and Ethereum (ETH)
blockchains.

*2. Private Blockchains*

Private blockchains are not open, they have access restrictions. People who want to join require
permission from the system administrator. They are typically governed by one entity, meaning
they are centralized. For example, Hyperledger is a private, permissioned blockchain.

*3. Hybrid Blockchains or Consortiums*

Consortiums are a combination of public and private blockchains and contain centralized and
decentralized features. For example, Energy Web Foundation, Dragonchain, and R3.

*4. Sidechains*

A sidechain is a blockchain running parallel to the main chain. It allows users to move digital
assets between two different blockchains and improves scalability and efficiency. An example
of a sidechain is the Liquid Network.

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*HISTORY OF BLOCKCHAIN*

Blockchain isn’t just a database, it’s a new technology stack with ‘digital trust’ that is
revolutionizing the way we exchange value and information across the internet, by taking out
the ‘gatekeepers’ from the process.

Blockchain history goes back farther than you might imagine, but we have condensed it by
answering four critical questions:

*Who Invented Blockchain?*

The first blockchain-like protocol was proposed by cryptographer David Chaum in 1982. Later in
1991, Stuart Haber and W. Scott Stornetta wrote about their work on Consortiums.

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But it was Satoshi Nakamoto (presumed pseudonym for a person or group of people) who
invented and implemented the first blockchain network after deploying the world’s first digital
currency, Bitcoin.

Cryptography is a deep and fascinating discipline with a history that goes back further than
blockchain.

*Who Owns Blockchain Technology?*

Because blockchain technology is the technology behind the blockchain, it cannot be owned.
It’s like the internet. But anyone can use the technology to run and own their own blockchains.

*Who Founded Bitcoin?*

Satoshi Nakamoto.

*Who Sent and Received the First Bitcoin Transaction?*

Nakamoto sent ten bitcoins to Hal Finney, who built the first reusable proof-of-work system in
2004.

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*HOW DOES A PUBLIC BLOCKCHAIN WORK (STEP-BY-STEP)*

Let’s start with an oversimplification.

As a society, we created ledgers to store information—and they have a variety of applications.

For example, we use ledgers in real estate to store a house’s records, such as when alterations
were made or when the house was sold. We also use ledgers in bookkeeping to record all the
transactions a company makes.

Bookkeeping mostly relies on double-entry accounting to store transactions. Although this is a

step-up from single-entry accounting that lacks transparency and accountability, double-entry
accounting also has its pitfalls: Entries are accounted for separately, making it difficult for one
counterparty to verify the other’s records.

Records stored using traditional ledgers are also easy to tamper with, meaning you can easily
edit, remove, or add a record. As a result, you are less likely to trust that the information is
accurate.

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Public blockchains solve both these problems by evolving the traditional bookkeeping model to
triple-entry bookkeeping: transactions on a blockchain are cryptographically sealed by a third
entry. This creates a tamper-proof record of transactions stored in blocks and verified by a
distributed consensus mechanism.

These consensus mechanisms also ensure new blocks get added to any blockchain. An example
of a consensus mechanism is proof-of-work (PoW), often referred to as “mining.”

Mining isn’t universal to all blockchains; it’s just one type of consensus mechanism currently
used by Bitcoin and Ethereum, though Ethereum plans to move to another—proof-of-stake
(PoS)— by 2022.

Here’s how this process works with Bitcoin. When sending Bitcoin, you pay a small fee (in
bitcoin) for a network of computers to confirm your transaction is valid. Your transaction is
then bundled with other transactions pending in a queue to be added to a new block.

The computers (nodes) then work to validate this list of transactions in the block by solving a
complex mathematical problem to come up with a hash, which is a 64-digit hexadecimal
number.

Once solved, the block is added to the network—and your fee, combined with all other
transaction fees in that block, is the miner’s reward. It’s that simple.

Each new block added to the network is assigned a unique key (via cryptography). To obtain
each new key, the previous block’s key and information are inputted into a formula.

As new blocks are continually added through the ongoing mining process, they become
increasingly secure and harder to tamper with. Anyone caught trying to edit a record will simply
be ignored. All future blocks then depend on information from prior blocks—and this
dependency from one block to the next forms a secure chain: the blockchain.

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For example, Block 2 provides a key after taking all the information from Block 1 into account
(including the key) and inputting it into a formula. Block 3, in turn, provides a new key after
taking all the information from Block 1 and Block 2 into account (including the key) and
inputting it into a formula. And so, the process repeats itself indefinitely.

Now, let’s dig deeper, exploring proof-of-work (PoW) vs. proof-of-stake (PoS) and the
blockchain trilemma, which are fundamental to the public blockchain’s functioning.

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*Proof of Work (PoW) vs. Proof of Stake (PoS)*

A public blockchain functions through consensus mechanisms: the process for validating
transactions without a third party like a bank.

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PoW and PoS are two such mechanisms. While their goal (to reach a consensus that a
transaction is valid) remains the same, how they get there is a little different.

*What Is PoW?*

PoW, the technical term for mining, is the original consensus mechanism. It is still used by
Bitcoin and Ethereum as of writing but, as mentioned, Ethereum will move to PoS by 2022.
PoW is based on cryptography, which uses mathematical equations only computers can solve.

The example in the previous section of how blocks get added to the Bitcoin Blockchain explains
this system.

The two big problems with PoW are that it uses a lot of electricity and can only process a
limited number of transactions simultaneously (seven for Bitcoin). Transactions typically take at
least ten minutes to complete, with this delay increasing when the network is congested.

Though compared to the days-long wait required to wire money across the globe, or even to
clear a check, Bitcoin’s ten-minutes delay is quite remarkable.

Other consensus mechanisms were created to solve these PoW problems; the most popular
being PoS.

*What Is PoS?*

PoS still uses cryptographic algorithms for validation, but transactions get validated by a chosen
validator based on how many coins they hold, also known as their stake.

Individuals aren’t technically mining, and there’s no block reward. Instead, blocks are ‘forged.’
Those participating in this process lock a specific number of coins on the network.

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The bigger a person’s stake, the more mining power they have—and the higher the chances
they will be selected as the validator for the next block.

To ensure those with the most coins aren’t always selected, other selection methods are used.
These include randomized block selection (forgers with the highest stake and lowest hash value
are chosen) and coin age selection (forgers are selected based on how long they have held their
coins)

The results are faster transaction times and lower costs. The NEO and Dash cryptocurrencies,
for example, can send and receive transactions in seconds.

*Blockchain or Scalability Trilemma: Decentralization, Security, and Scalability*

Most blockchain projects are built around three core properties: decentralization, scalability,
and security. Developers are constantly trying to balance these aspects, so that neither one
isn’t compromised.

But they often have to sacrifice one for the others. The ‘blockchain trilemma,’ concept was first
coined the ‘scalability trilemma’ by Ethereum founder, Vitalik Buterin.

Let’s look at these concepts in more detail and explore the tradeoffs:

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*Decentralization*

Decentralization means there’s no central point of control. Instead, decisions are made via
consensus over a distributed network of computers.

There is, however, one significant tradeoff: speed. Sending transactions takes longer because
multiple confirmations are required to validate a transaction. Hence why Bitcoin is slow.

*Scalability*

Scalability is the ability of the system to cope with a growing number of transactions. Scalability
is crucial for mass adoption because any system needs to operate efficiently as more people
use it.

Below is a rough breakdown of how many transactions Ethereum, Bitcoin, and credit card
companies can process per second:

Bitcoin: seven transactions per second

Ethereum: 30 transactions per second

Credit cards: 5,000 credit card transactions per second with the ability to process much more if
needed. Visa, for example, can process up to 24,000 transactions per second.

But achieving scalability often comes at the expense of decentralization. EOS, for example,
promises a maximum of 4000 transactions per second but has come under criticism for being
too centralized.

*Security*

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Security is the ability of a blockchain to be protected from attacks. Unfortunately, exchanges
and source code have been hacked on many occasions, suggesting that many developers focus
on scalability and decentralization at the expense of security.

*WHAT IS THE DIFFERENCE BETWEEN BITCOIN AND ETHEREUM BLOCKCHAINS?*

Bitcoin and Etherum are the two biggest cryptocurrencies and blockchains, so discussing and
comparing them makes sense.

*Bitcoin Basics*

The Bitcoin network is a public, decentralized peer-to-peer payment network that allows users
to send and receive bitcoins without a bank getting involved. The digital currency or bitcoin
token uses the ticker symbol BTC, and is the only cryptocurrency traded on the Bitcoin network.

Transactions are recorded using a digital ledger, and nodes ensure the PoW consensus
mechanism is followed (or that mining happens). For many, Bitcoin seems complicated, but it
isn’t when you view it as a combination of three things:

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A peer-to-peer payment system: You can send money (BTC) from one person or company to
another without the need for a bank. Sending money this way is faster, more secure, and
cheaper than using traditional methods.

A decentralized system like the internet, so it’s not controlled by one entity and cannot be
stopped by a third party.

A store of value like gold (often called digital gold), but much easier to transfer than gold.

*Ethereum Basics*

In 2013, after traveling, meeting with bitcoin developers, and discovering Bitcoin’s limitations,
Vitlaik Buterin decided to improve upon the Bitcoin blockchain and built Ethereum.

The Ethereum network is a public, decentralized peer-to-peer network. Like Bitcoin, it uses
nodes and allows users to send and receive cryptocurrency—in this case, Ether.

The network is much more than a payment system—it was primarily created to deploy
decentralized applications (dapps) and smart contracts.

Dapps are simply ‘decentralized apps,’ or computer programs that interact with the Ethereum
blockchain. Smart contracts, however, operate on the Ethereum blockchain, and are contracts
that automatically execute without an intermediary once certain conditions (written into
computer code) are met. For example, a smart contract could be programmed to send a
designated person a portion of your Bitcoin when you die.

*Ethereum vs. Bitcoin Blockchains*

In summary, Bitcoin and Ethereum networks are public, decentralized peer-to-peer networks
with their own tokens: bitcoins and Ether. Both rely on cryptography, and both use digital
ledger technology.

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But they differ significantly in purpose and capability. Bitcoin is a decentralized payment system
and a store of value. Its blockchain is a database of all bitcoin transactions and tracks their
ownership. Ethereum is more than a payment system and allows smart contracts and apps to
be built on it, making it a more sophisticated blockchain.

*WHAT ARE THE BENEFITS OF BLOCKCHAINS OVER TRADITIONAL FINANCE?*

Trust: The blockchain is immutable and automates trusted transactions between counterparties
who do not need to know each other. Transactions are only executed when programmed
conditions are met by both parties.

Unstoppable: Once the conditions programmed into a blockchain protocol are met, an initiated
transaction cannot be undone, changed, or stopped. It’s going to execute and nothing – no
bank, government, or third party – can stop it.

Immutable: Records on a blockchain cannot be changed or tampered with – Bitcoin has never
been hacked. A new block of transactions is only added after a complex mathematical problem
is solved and verified by a consensus mechanism. Each new block has a unique cryptographic
key resulting from the previous block’s information and key being added into a formula.

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Decentralized: No single entity maintains the network. Unlike centralized banks, decisions on
the blockchain are made via consensus. Decentralization is essential because it ensures people
can easily access and build on the platform.

Lower Cost: In the traditional finance system, you pay third parties like banks to process
transactions. The blockchain eliminates these intermediaries and reduces fees, with some
systems returning fees to miners and stakers.

Peer-to-Peer: Cryptocurrencies like Bitcoin, let you send money directly to anyone, anywhere in
the world, without an intermediary like a bank charging transaction or handling fees.

Transparent: Public blockchains are open-source software, so anyone can access them to view
transactions and their source code. They can even use the code to build new applications and
suggest improvements to the code. Suggestions are accepted or rejected via consensus.

Universal Banking: 2 Billion people globally do not have a bank account. Because anyone can
access the blockchain to store money, it’s a great way to bank the unbanked and protect
against theft that can happen due to holding cash in physical locations.

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*WHAT ARE THE DISADVANTAGES OF BLOCKCHAINS?*

Public open source blockchains are not without their hazards and challenges. Here is a list of
the top concerns:

*1. Environmental Impact*

Blockchain networks like Bitcoin use a lot of electricity to validate transactions, leading to
environmental concerns. For example, Bitcoin consumes more electricity than a small, medium-
sized African country, and Bitcoin mining is threatening China’s climate change goals.

However, many would argue that Bitcoin is held to higher environmental standards than
anyone and anything. This may be true, especially if you consider that the blockchain and
Bitcoin are an alternative to the traditional finance system that uses much more electricity and
has a much larger environmental impact.

A study by Galaxy Digital suggests Bitcoin energy consumption is less than half that of the
traditional banking system. If anything, you could argue that Bitcoin is a step in the right
direction for the environment.

No one is saying that making strides to lowering the carbon footprint shouldn’t be on the
agenda (this is already happening with some mining farms shifting to renewable energy sources
like solar panels and the El Salvadoran President calling for a plan to use geothermal energy
(volcanoes) to mine Bitcoin).

But it’s crucial to maintain a balanced view when viewing the cost, environmental impact, and
blockchain benefits.

*2. Personal Responsibility*

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One of blockchains and cryptocurrencies’ most significant advantages is also its biggest
weakness. When you invest in public open-source blockchains by mining or buying
cryptocurrencies and store it in your cryptocurrency wallet (your wallet is like your bank
account, except only you can access it and have the passwords), only you control your money.

You are your own bank— and this is great! But if you lose your seed phrases (the list of words
that give you access to recover your wallets) there is no recourse (compared to banks where
you can reset your password). Your money is lost forever.

Unsurprisingly, a large portion of Bitcoin remains permanently lost. According to some

estimates, 20% or 3.7 million of the currently minted Bitcoin is probably lost forever.

*3. Growing Pains*

Even though public blockchains remain more efficient than traditional banking systems,
decentralization comes at the cost of scalability. Trying to grow blockchain networks to global
capacity, in turn, is the root cause of speed inefficiencies. It’s why, as we saw, Bitcoin and
Ethereum can only process a maximum of seven and 30 transactions per second, respectively,
compared to Visa’s 24,000 transactions per second.

Luckily solutions are being built to improve scalability and the speed of transactions. For
example, the lightning network allows transactions to happen off the Bitcoin blockchain to
speed up transactions. On Ethereum, many innovative Layer 2 (L2) solutions are being
developed to improve scalability and speed including rollups, zero-knowledge proofs and side
chains.

*4. False Narratives*

Some cryptocurrencies are undoubtedly used in unlawful activity. The most famous example is
Silk Road: people laundered money and bought drugs on the platform using Bitcoin.

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However, this is no different from the illegal activity that constantly happens when people use
other currencies like Kenyan shillings, Dollar e.t.c.

This false narrative that cryptocurrencies are only or mainly used for illicit activities only delays
their inevitable adoption, which can hugely benefit everyone, including the financial system.

*PROMISING BLOCKCHAIN USE CASES AND APPLICATIONS*

Blockchain technology is currently used across various industries like supply chain, healthcare,
retail, media and advertising, financial services, insurance, travel and transportation, oil and
gas, and gaming.

Here are some promising use cases:

Cryptocurrencies: The ‘killer app’ of blockchains today is internet money. Cryptocurrencies let
you transfer value faster and cheaper across borders without a bank. Besides Bitcoin and
Ethereum, other digital currency examples include Polkadot (DOT), NEO, Cardano (ADA), Tether
(USDT), Binance Coin (BNB), and Litecoin (LTC).

Smart Contracts: These blockchain applications are contracts that automatically execute
without an intermediary once conditions written into the computer code are met.

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Decentralized Banking: The use of blockchain technology is also proliferating in banking. For
example, many banks like Barclays, Canadian Imperial Bank, and UBS are interested in how
blockchain can make their back-office settlement systems more efficient.

Video Games/Art: You may have heard Crypto Kitties—a game launched on the Ethereum
blockchain. One of the virtual pets in the game was sold for over $100,000.

Peer-to-peer Energy Trading: People buy or sell energy directly without an intermediary.

Supply chain and logistics tracking: Blockchain is being used to track precious metals’ origins
and foods. For example, Walmart and IBM worked together to create a food traceability system
based on open-source ledger technology, making it easier to trace contaminated food.

Healthcare process optimization: Blockchain can speed up the time required to pay health
insurance payments to patients and store and securely share medical data and records.

Real estate processing platform: Property ownership like land and buildings records can be
securely stored and verified on the blockchain. These records cannot be tampered with, so you
can trust they’re accurate and more easily verify property ownership.

NFT marketplaces: These are marketplaces that allow you to buy nonfungible tokens (NFTs):
digital tokens of things like paintings and clothing.

Music royalties tracking: Blockchain can trace music streams and immediately pay those who
contributed to a song.

Anti-money laundering tracking system: Authorities can more easily track the original source of
money because every transaction on the blockchain is recorded and leaves behind a tamper-
proof trail.

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Personal identity security: Traditional systems for storing identities are insecure and
fragmented. Blockchain provides a unified, immutable, and interoperable infrastructure so you
can store and manage records securely and efficiently.

New insurance distribution methods: For example, peer-to-peer insurance, parametric

insurance, and microinsurance.

Automated Advertising Campaigns: Advertisers can use smart contracts to automate

advertising campaigns, e.g., an audience is only shown an ad when specific criteria are met.

*HOW TO INVEST IN BLOCKCHAIN TECHNOLOGY*

With blockchain offering some promising use cases, helping many companies become more
efficient, and attracting big companies like Amazon and Tesla, it can be an attractive
investment.

But there are risks: It’s a new technology, and many projects will not pan out. So, invest only
what you can afford to lose, do your own research to determine if the project (or initial coin
offering) is worth investing in, and decide what level of exposure you want.

For example, you can get more exposure by investing in cryptocurrencies directly instead of an
exchange-traded fund (ETF).

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That being said, here are a variety of ways you can invest in the blockchain depending on your
goals and risk tolerance:

Buy shares in companies using blockchain (e.g., Visa, Walmart, and Siemens) on traditional
stock exchanges. You can buy shares by using an online broker such as Vanguard and
Betterment (U.S.).

Invest in companies with Bitcoin on their balance sheet, e.g., Square, WeWork, MicroStrategy,
and Tesla. Again, use an online broker to buy shares.

Buy cryptocurrencies like Bitcoin or Ethereum directly on Centralized Finance (CeFi) or

Decentralized (DeFi) exchanges. Centralized exchanges were the norm in the crypto world until
decentralized exchanges arrived. With centralized exchanges, you don’t have your own private
keys, and the exchange is the custodian for storing your funds. Decentralized exchanges are
peer-to-peer, and there’s no intermediary. Examples of CeFi exchanges include Binance,
Kraken, Bittrex, Bitfinex, Luno, and Coinbase. Examples of DeFi exchanges include Uniswap,
Compound, KyberSwap, Airswap, IDEX, SushiSwap, Balancer, and Totle.

Invest in crypto exchange-traded funds (ETFs). ETFs are a basket of securities that track an asset
or index you can buy or sell on an exchange throughout the day. For example, many traditional
ETFs will include bonds, currencies, commodities, and stocks and track the S&P 500 Index. In
the crypto space, you get a variety of ETFs you can invest in, such as a Bitcoin ETF that tracks
the price of Bitcoin. Each ETF will differ depending on who issues it. Companies that offer ETFs
include Grayscale, Galaxy Digital, and Gemini.

Invest in crypto mining companies such as Riot, Hive, and Marathon. Many mining companies
let investors participate indirectly by offering equity in their companies. To invest in Riot, use an
American-based online broker like Robinhood. To invest in Hive and Marathon, use a Canadian-
based broker like Questrade, TD Direct Investing, or BMO InvestorLine.

Buy crypto hardware and mine cryptocurrency yourself. While Bitcoin mining requires a large
capital outlay, there are other tokens you can mine for a reasonably low barrier to entry.

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Invest in mining pools. An alternative to mining cryptocurrency yourself is to join a mining pool.
Mining pools pool together the computational power of others on the network to improve the
chances of mining a block. The rewards for all blocks mined are shared among miners in the
pool. Slush Pool is a popular mining pool.

*Finally*

With many promising real-world use cases like faster cross-border payments and smart
contracts, blockchain technology is here to stay.

As more companies realize how the blockchain can help them, they will commit more
resources, money, and time into the technology—and even more use cases will emerge. While
we understand that blockchain technology will remain a complex topic for many, it really
doesn’t have to be for you.

We hope that our training will give you the confidence to have conversations with friends and
acquaintances about the blockchain.

*END OF DAY 11 INVESTING IN BITCOINS TEACHING SESSION*

Our Whatsapp Investing in Bitcoins Training group is now open for questions and discussions on
what we have learnt today.

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This Investing in Bitcoins Training has been organized and brought to you by;

Justine Nyachieo
Business Man & Mentor
+254742304047

Timothy Angwenyi
Business Consultant
+254701711058

Feel free to Contact us on Whatsapp or on a Call.

 Let’s meet next for Day 12 of our Investing in Bitcoins Training.

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