The Blockchain revolution is undoubtedly under way and has gained significant traction over the past few months. Now more than ever people are discovering, learning, and some executing their first on chain transaction.
Blockchain and bitcoin are difficult concepts to grasp. Few people outside cryptographers and true tech enthusiasts immediately "get" the underlying technology, especially when lots of tech lingo is used. It is true it is not easy if it were, then everyone would be experts on the concepts in this space and there wouldn't be so many opportunities for those willing to take the time to learn.
Bitcoin with a capital "B" refers to the network (or blockchain), while bitcoin with a lowercase "b" refers to the bitcoin cryptocurrency.
In our traditional banking system, if one wishes to transfer U.S. dollar, you must do so in person or through an intermediary. Bitcoin (the network) allows you to transfer the bitcoin currency peer-to-peer with no intermediary. I can take out my phone and transfer $5 million in bitcoin to you and you will receive it within minutes, no intermediaries required. Blockchain allows us to complete transactions that are impossible in today's traditional financial system.
The blockchain solves a simple problem of how to verify transactions, with sophisticated and brilliant mathematics. Without blockchain technology, transactions can only occur when a trusted partner or intermediary (this could be a trusted company, a bank , or a government) is involved, you can't simply verify a transaction on its own.
Blockchains have intuitive solutions for this issue. With a blockchain, everyone keeps the ledger. And the mathematics of adding to the ledger makes sure that everyone keeps the same ledger and no one can add in false information. Picture the Bitcoin blockchain as a large excel spreadsheet that shows the complete transaction history and location of every bitcoin. Every 10 minutes, the spreadsheet gets updated as an additional "block" of new transactions is added. Everyone can have a copy of the spreadsheet as it is completely transparent.
Now I will say this may not sound too exciting and just another way of storing records digitally, but you must think a little outside of the lines of what makes the blockchain possible to grasp the array of new possible transaction types.
In 2008, a person or persons going by the name Sataoshi Nakamoto published a paper titled "Bitcoin: A Peer-to-Peer Electronic Cash System". The paper covers many amazing issues, including a solution to the double-spending problem which had stumped computer scientists for decades. The paper sets the foundation for the blockchain as a verification system and set the standard for a new currency. Shortly following the release of the paper, Satoshi Nakamoto released the first version of the Bitcoin software.Then, Satoshi Nakamoto disappeared. Many speculate on who the brain behind bitcoin is, however it is highly likely the inventor will reveal themselves. Furthermore the identity of the inventor is not of great importance, it is the technology and the scale humanity has brought it to today.
Prior to bitcoin no true digital currency existed, mathematics simply didn't allow it. Dollars in the form of cash work because the ownership is clear. If I hand you a $10 bill, you know we have transacted and you now have ownership. But, cash transactions can only happen in person. So how can we move cash to the digital era? So far it has been credit cards, and payment applications such as paypal and venmo. Nonetheless all solutions prior to the blockchain required an intermediary. However bitcoin is different, it does not require banks, institutions, or governments. It is open and free software that exists on a worldwide network of computers and can never be shut down, revoked, or removed from the Internet. There is no central authority, record keeper, or server.
Now you are probably saying this all sounds great but how does the blockchain work if there is no “ceo” or institution in charge. Let's break down the technology. Depending on your technology background this may be your first time hearing some of these terms, please don't be discouraged, read it over a second time or run a google search (you're probably not the only one with that question).
As I mentioned previously, every 10 minutes a new block is added to the network. Let's explore how this happens, who's “job” is to keep the network running, and how attackers are deterred from compromising the network.
That's the job of the nodes, also known as miners. Nodes are the computers or large computer systems that support the Bitcoin network and keep it running smoothly. Full nodes (Miners) are run by individuals or groups of people who purchase powerful computer systems, known as mining rigs.
For simplicity purposes we will discuss two node types. Full nodes and lightweight nodes.
Full nodes, keep a complete copy of the blockchain (the giant Excel spreadsheet). This is a record of every single transaction that has ever taken place. It is currently more than 400 gigabytes in size.
Lightweight nodes, on the other hand, only download a fraction of the blockchain. Lightweight nodes are used most by individuals for bitcoin transactions. A lightweight node will communicate with a full node when it wants to transact.
So full nodes (or miners) run the spreadsheet, but what keeps the spreadsheets synchronized between them all? Decentralization is crucial, emphasizing the number of people who can run a full node isn't limited.
We must first understand the concept of a wallet, and how they work on the blockchain. It is very quick and simple to create a bitcoin wallet, anyone can do so within minutes. Upon creating a wallet two important pieces of information are generated for you. Your “public key”, and “private key”.
Your “public key”, also know as public address, or bitcoin address is string of numbers and letters. Think of it like an account username, or your friends venmo name. You can share your “public key” to anyone who will be transacting with you.
Your “private key” is virtual password, thus you must keep it safe and never share it. It is also important you store the password in a safe place, preferably written on paper stored in secure location. Furthermore it is important to note that no centralized entity can recover your password, it is not like traditional financial accounts. Additionally if someone gets a hold of your private keys, they have control of your wallet.
Let's say Joe sends one bitcoin to Patrick. When the transaction is processed by the blockchain, the spreadsheet is updated. One bitcoin is deducted from Joe’s balance, and Patrick’s balance is credited one.
First Patrick tells Joe his public key (public address). Then joe opens his bitcoin wallet, enters the instructions to send one bitcoin to Patrick’s public key. Joe enters his private key to authorize the transaction and hits send. Within minutes both parties can open their wallet and see their updated respectively.
It is to key understand what is happening behind the scenes here.
First, the network quickly reviews the proposed transaction. In this example a lightweight node would check to see if Joe had enough bitcoin in his wallet, and if Patrick provided a valid bitcoin address.
If the transaction passes both of these test it then gets bundled together with other pending transaction into something called a “block”. That block the goes to miners, who attempt to verify and add it to the blockchain (updates the large spreadsheet).
How can miners add a block to blockchain, this is where mathematics and computing power come into play. To truly grasp this concept, we must explore “hashes”.
A “ hash value” is a series of numbers and letters linked together that look something like this, ad57366865126e55649ecb23ae1d48887544976efea46a48eb5d85a6eeb4d306.
A hash value is generated by inputting data through a mathematical formula called a “hash function”.
Think of it like the ingredients for your cake you are baking. You have your ingredients (your data), put it in the oven (the hash function), and you get your cake (the hash value). Furthermore hashing is a one way process. If you give me a hash value I can not turn it back to it’s original data input, just as you can not return a cake into its original ingredients.
Miners are given blocks to attempt to verify and add to the blockchain, when doing so miners use a hash function to solve a cryptographic puzzle.
Miners will take the new block filled with the transactions, combine it with a nonce, which is a randomly generated numbers string, put it through a hash function, then get a particular hash value. Miners are attempting to find a hash value that starts with a specific number of zeros. They will keep attempting with different nonces until they get the needed hash value.
Miners are in a race to find the correct hash value. This is because the miner who finds the correct solution will broadcast it to the network, which verifies it is correct. The new block gets added to the blockchain and the winning miner is awarded 6.25 bitcoin for its success. It is important to note that mining reward is halved after every 210,000 blocks or approximately every four years.
Joe’s bitcoin transaction is now recorded on the blockchain. Patrick’s bitcoin wallet has been credited one bitcoin, and Joe’s has been debited one bitcoin.
This process then starts over again, with a whole new bunch of transactions combined into a new block in which the miners compete to find the correct hash value first.
As miners that try different nonces faster stand a higher chance of winning a block, individuals and companies continually add more and speedier computers (mining rigs) to be faster than the next guy.
However does not mean that blocks will be mined faster, which in turns cause rewards at a faster rate? No, the Bitcoin algorithm eliminates this issue. Every two weeks the algorithm increases the required numbers of zeros that a has value must start with. Thus ensures the total network mining capacity (known as hashing power) can only generate one block about every 10 minutes.
Bitcoin is just one of the numerous blockchains. Bitcoin has shown the proof of concept for blockchain, however the opportunities reach far beyond just bitcoin.
It is up to you to decide if bitcoin is an asset you want to own, however it is important to understand the underlying technology and why so many believe it will disrupt how we grasp and use money while impacting the global financial systems.