Cryptocurrency for Dummies: Understanding Bitcoin and the blockchain technology
Written By
FidolaTechnical Writer | Blockchain and Crypto writer | Content Writer
Reviewed By
Franklin IzuchukwuCrypto Writer, Business Writer and Radiographer
Throughout history, humanity has grappled with the challenge of trust, from ancient tales of betrayal to modern-day economic crises. Middlemen emerged to bridge this trust gap, yet their services often proved costly, leaving many excluded from financial security.
The rise of the internet initially promised a democratized exchange of information, only to be overshadowed by corporate dominance and data exploitation. Then, in 2008, the world was rocked by a financial meltdown, exposing the fragility of traditional banking systems and leaving countless individuals devastated.
It was in the wake of this crisis that Satoshi Nakamoto unveiled the revolutionary Bitcoin whitepaper, a beacon of hope for a financial system impervious to corruption. Bitcoin, the pioneer of cryptocurrency, represents a new era of digital currency, transcending physical boundaries and challenging the status quo of traditional money.
But Bitcoin is just one facet of a larger innovation: blockchain technology. A blockchain is not merely a chain of digital blocks; it is a decentralized ledger, a digital backbone of trust and transparency. Unlike traditional ledgers, which are prone to manipulation and control, blockchain operates autonomously, distributed across a network of users.
Much like the human body has its fundamental components, so too does a blockchain possess six core principles encoded within its very fabric. These principles serve as the bedrock of its functionality, ensuring security, transparency, and decentralization.
In this comprehensive guide, we delve into the heart of Bitcoin and blockchain technology, demystifying complex concepts and empowering readers to grasp the transformative potential of this digital frontier.
By the end of this journey, you will not only comprehend the fundamentals of Bitcoin but also appreciate the intricate workings of its underlying infrastructure, paving the way for a deeper understanding of the decentralized revolution.
The 6 Principles of Blockchain: How Cryptocurrency Works
The six principles of blockchain are the underlying technology of any cryptocurrency, such as Bitcoin, Ethereum, Solana, etc. These principles make digital money possible.
Here are some of these principles, how they work and how they began the evolution of a new financial system that changed the world.
1. Network Integrity
Integrity is commonly defined as honesty and adherence to moral principles. In our imperfect world, trust can be elusive, as malicious actors often seek to exploit others.
To foster trust among individuals, banks have long served as intermediaries, offering security for financial transactions.
However, centralizing control over finances and identities can lead to a lack of transparency, a factor contributing to the 2008 financial crisis. This crisis, triggered by the collapse of the subprime mortgage market, led to significant economic downturns globally.
The question arises: what happens when corporations succumb to greed, potentially causing financial turmoil similar to that of 2008? These concerns were addressed by Satoshi Nakamoto, who introduced Bitcoin in 2008.
Bitcoin operates on a decentralized ledger called the blockchain, eliminating the need for traditional banking intermediaries. This system empowers individuals with full control over their finances, enhancing transparency and reducing reliance on centralized authorities.
Blockchain technology ensures integrity through built-in protocols that enforce honesty, regardless of participants' intentions. This decentralized approach offers a more efficient method for conducting transactions, minimizing the need for intermediaries and fostering trust in the system.
As of February 2025, Bitcoin's supply is capped at 21 million coins, with approximately 19.8 million already mined. This scarcity contributes to its value, as demand continues to grow.
2. Distributed Power
Blockchain technology is a decentralized digital ledger that securely records transactions across a network of computers. Unlike traditional centralized ledgers, where a single authority manages and stores data, blockchain distributes data across multiple participants, ensuring transparency and security.
Consider a household where one person maintains the grocery list, manages purchases, tracks the budget, and keeps a private record. This centralized approach mirrors traditional banking systems.
Now, imagine a scenario where the grocery list is shared with every family member. Each time an item is purchased, the list is updated, ensuring everyone has the most current information. This distributed method exemplifies how blockchain operates.
The Bitcoin blockchain functions similarly to this shared grocery list. It publicly records all transactions within the Bitcoin network, allowing participants to view and verify each transaction. This transparency ensures that all users have access to the same information, reducing the risk of fraud.
In traditional financial systems, central authorities control and verify transactions. In contrast, the Bitcoin network operates collaboratively, with each participant contributing to the validation and recording of transactions. This decentralized approach eliminates the need for a central authority, distributing trust among network participants.
Every transaction on the Bitcoin network is visible to all participants, preventing fraudulent activities. Since each user has access to the complete transaction history, they can verify balances and transaction details, similar to how banks monitor account activities.
As of February 2025, the Bitcoin network continues to operate with over 100,000 active nodes worldwide, processing approximately 300,000 transactions daily. The total number of Bitcoins mined has reached 19.8 million, approaching the maximum supply limit of 21 million. This widespread participation and finite supply contribute to the network's security and the cryptocurrency's value.
3. Provision of Value
Blockchain technology employs cryptocurrencies as tokens of value to incentivize user participation and maintain network security.
Participants are rewarded for validating transactions and adding new blocks to the blockchain, encouraging ongoing engagement. These rewards are distributed through consensus mechanisms such as Proof of Work (PoW) and Proof of Stake (PoS).
Proof of Work (PoW):
In PoW, miners compete to solve complex mathematical puzzles to validate transactions and add new blocks to the blockchain.
The first miner to solve the puzzle successfully appends the block and receives a reward in the form of cryptocurrency. This process, known as mining, requires substantial computational power and energy consumption. citeturn0search2
Proof of Stake (PoS):
PoS selects validators based on the number of coins they hold and are willing to "stake" as collateral. Validators are chosen to create new blocks and confirm transactions, receiving rewards in return. This method is more energy-efficient than PoW, as it doesn't require intensive computational work.
Lets us also use similar example as of earlier, consider a household where a family member brings home groceries unexpectedly and offers a reward to whoever unpacks and stores them. Everyone is interested, but the person who starts and completes the task first takes a picture as proof and presents it to the others. Upon verification, they receive the reward.
Similarly, in a blockchain network, participants (miners or validators) work to validate transactions and add them to the blockchain. The first to successfully do so provides proof of their work or stake, and upon verification by the network, they receive a reward.
Current Data (as of February 2025):
Bitcoin Mining Rewards: Following the 2024 halving event, the reward for mining a new Bitcoin block decreased from 6.25 BTC to 3.125 BTC. This reduction has increased the cost to produce one Bitcoin to around $106,000, while the current trading price hovers around $102,175, leading to narrow profit margins for miners.
Energy Consumption: Bitcoin's PoW mechanism continues to face criticism for its high energy usage, accounting for about 0.5% of global electricity consumption. In contrast, Ethereum's transition to PoS in September 2022 reduced its energy consumption by 99.9%, highlighting the efficiency of PoS systems.
Blockchain Technology
4. Security
Security is crucial to blockchain technology. Traditionally, a centralized body (the owner of the database and platform) is responsible for security. Malicious actors can access vast amounts of private data if this central security is breached.
Blockchain technology eliminates this central entity, enhancing security. Information is stored across multiple devices called nodes. These nodes verify transactions and ensure the smooth operation of the network.
While not completely unhackable, the resources required to attack a blockchain network are typically much greater than any potential gains. Imagine spending much money to steal a much smaller amount - it wouldn't be profitable.
One potential vulnerability exists in a cryptocurrency term described as a 51% attack, where a miner controls more than half of the network's processing power. However, this requires immense computing resources, making it very expensive for an attacker.
The system itself discourages malicious behavior. Miners are rewarded for adding valid blocks to the blockchain. If a miner attempted to manipulate the system with a fraudulent block, the network would reject it, wasting their resources and denying them a reward. Malicious miners find it more profitable to follow the rules and earn legitimate rewards than to risk destroying the entire system and their holdings.
5. Privacy and Preservation of Rights
Blockchain technology offers innovative solutions for enhancing privacy and preserving individual rights in the digital realm.
By enabling decentralized and pseudonymous interactions, blockchain empowers users to maintain control over their personal information, mitigating concerns associated with centralized data collection and surveillance.
Every individual is entitled to fundamental human rights, which include the right to privacy and protection from unwarranted surveillance.
In the digital age, online interactions often leave data trails that can be exploited by entities with sufficient resources, potentially infringing upon these rights. Traditional internet infrastructures frequently lack robust privacy measures, leading to unauthorized data collection and commercialization without user consent.
Blockchain also addresses these privacy challenges by allowing users to interact without disclosing personal identifiers.
Upon joining a blockchain network, users receive a pseudonymous identity, typically represented by alphanumeric addresses, which conceals their real-world identities. This pseudonymity enables individuals to engage in transactions and communications securely and privately.
Furthermore, users can generate multiple public addresses, enhancing their ability to conduct activities anonymously. Transactions are recorded on the blockchain, but the absence of direct personal identifiers in these records safeguards user privacy.
Smart Contracts and Autonomous Transactions
Smart contracts are self-executing agreements with terms encoded directly into software, play a strong role in preserving rights on the blockchain.
They automatically execute predefined actions when specific conditions are met, eliminating the need for intermediaries and reducing the risk of human error or manipulation.
This automation ensures that transactions are conducted fairly and transparently, upholding the rights of all parties involved.
Privacy-Enhancing Technologies
To further bolster privacy, certain blockchain platforms implement advanced cryptographic techniques. For instance, Zcash utilizes "zk-SNARKs" (zero-knowledge succinct non-interactive arguments of knowledge) to enable transactions that do not reveal information about the sender, receiver, or transaction amount, ensuring complete confidentiality.
Balancing Transparency and Privacy
While blockchain's transparency is beneficial for security and trust, it also presents challenges in terms of privacy.
Innovations such as "Privacy by Layers" (PbL) propose creating different levels of data accessibility to ensure compliance with data protection regulations like the General Data Protection Regulation (GDPR). This approach aims to balance the immutable nature of blockchain with the need for individual data rights.
Current Developments:
As of February 2025, projects like Worldcoin are exploring the integration of biometric data with blockchain to establish unique digital identities.
Worldcoin's initiative involves scanning individuals' irises to create a "World ID," aiming to distinguish humans from AI entities. While this approach seeks to enhance security and trust, it has raised significant privacy concerns and regulatory scrutiny in various countries.
Artwork on crypto and blockchain.
6. Everyone is Welcome to the Party
Blockchain technology embodies inclusivity by providing open access to financial services, irrespective of an individual's race, ethnicity, or financial background. Unlike traditional financial systems that often impose stringent eligibility criteria, blockchain offers a decentralized platform where participation is unrestricted.
As of recent data, approximately 1.4 billion adults worldwide remain unbanked, lacking access to traditional banking services. This financial exclusion is prevalent in various regions, with countries like Morocco and Vietnam having significant unbanked populations.
Blockchain technology addresses these barriers by enabling individuals to access financial services without the need for traditional banking infrastructure. With internet connectivity, users can create digital wallets and engage in transactions, effectively participating in the global economy. This inclusivity is particularly beneficial in regions where traditional banking services are limited or inaccessible.
One of the standout features of blockchain is its ability to facilitate cross-border transactions seamlessly. Users from any country can transact directly with one another, bypassing the complexities and fees associated with traditional international financial systems. This borderless nature not only simplifies global commerce but also promotes economic integration.
The adoption of blockchain technology is on the rise, with over 300 million people worldwide utilizing blockchain-based services. This growing user base reflects the technology's potential to democratize access to financial services and promote economic inclusion.
Conclusion
Blockchain technology is not a recent invention. It existed for some time before gaining widespread recognition due to Satoshi Nakamoto's use of it in creating Bitcoin. Blockchain empowers users by returning control. Users deserve compensation for their data and the freedom to use it as they see fit.
However, a question remains: has Satoshi's vision of a fully decentralized financial system materialized?
The answer is complex. While Bitcoin and other cryptocurrencies offer a level of decentralization absent in traditional finance, some argue it is insufficient due to persistent issues like the blockchain trilemma.
A few mining pools control a significant portion of Bitcoin's hashing power, raising concerns about potential manipulation. Additionally, cryptocurrency exchanges, acting as gateways for buying and selling digital assets, can become centralized points of vulnerability.
The future of blockchain is uncertain. Regulations and innovations could lead to a more distributed cryptocurrency landscape, aligning closer with Satoshi's original vision. Alternatively, powerful entities could emerge within the blockchain space, mirroring the very problems Bitcoin was designed to address.
The outcome will likely depend on a combination of factors: technological advancements, regulatory decisions, solutions to the blockchain trilemma, and the choices made by users and developers.
One thing is certain: the fight for decentralization in the digital age is far from over; this is just the beginning.