Since 2010, banks have begun introducing increased bureaucratic barriers when opening accounts for citizens, making it more difficult to withdraw personal funds from the country and emigrate in general. Banks must comply with compliance standards that depend on local laws. Otherwise, they can be forced to pay large fines or even have their banking license revoked. Risks associated with insufficient background checks and customer reliability can include prosecution for terrorist financing, money laundering, state corruption, and secondary sanctions when servicing Russian clients.
Cryptocurrencies have become a popular way to bypass these restrictions. In this article, I will analyze the principles of their operation using Bitcoin and Ethereum as examples. Here, you will learn:
What is a block chain, and why is it structured as a chain of linked blocks?
What is mining, and why does it consume so many computing resources?
What is a monetary transaction, and why are blockchains so slow and expensive?
How do “second-level” systems work in block chain protocol networks, and how do they make transactions fast and cheap?
What is a smart contract?
How do stablecoins like USDT work?
Is there a way to make your monetary transactions truly anonymous, and is it possible to escape the control of all-powerful financial regulators with the help of cryptocurrencies
The article is designed for beginners and does not require any special knowledge. It clearly explains everything required to understand cryptocurrencies, down to such basic concepts as hash and asymmetric encryption.
How Bitcoin works.
The Bitcoin block chain is a chain of linked blocks. A block is a store of transactions. A transaction is an electronic record of a money transfer. I’ll explain later why transactions are stored in blocks and why those blocks need to be linked, but for now, let’s imagine that the block chain is simply a history of all the transactions that have ever happened on the Bitcoin network and that it’s stored in some abstract place that everyone on the network can access. Any participant can spend their bitcoins by adding new transactions to the block chain, but they can’t erase or overwrite existing transactions.
Transaction's role in Bitcoin can be a bit of a mind-bender. That’s because money on the block chain isn’t stored in Bitcoin wallets like it is in a bank account balance. All the money on the Bitcoin network is stored in transactions, and to make a money transfer, you have to create a new transaction by moving bitcoins from some existing transaction into it. The balance of your Bitcoin wallet is stored in the transactions you have access to, and you have access to the transactions that are “opened” by your secret cryptographic key. The main function of a Bitcoin wallet is to store this secret key.