Bitcoin & Blockchain. How do they work?
A technical explanation for those who want to dive deeper into this Blockchain thing.
Why is Bitcoin’s blockchain decentralized?
Dear reader, before you read this article I want you to know this is not financial advice. Do your own research before investing your money. This is an educational intended article. I’m just explaining what I wish someone had told me before I started the Cryptocurrencies journey.
I guess if you’ve landed over here you do already know what Bitcoin is, but you do not fully get how does it work, so stop worrying, you are in the right place!
First of all I’ll make an introduction about Blockchain Technology, and later on I’ll explain how does Bitcoin implement this Technology.
Blockchain is nothing more than a specific type of database (I assume you do know what a database is), but its main difference with traditional databases is the way it stores and structures data.
A Blockchain, stores its data in groups, also known as blocks. These blocks do have a limit of storage, and when they are filled, they get chained onto the previous block, forming a chain known as a blockchain. Each one of this blocks, when it joins the blockchain, is given an exact timestamp.
The interesting part about this specific type of databases is that it operates inside a network of computers. Before each block is chained, it needs to be approved by the majority of the computers that form the network, this way the network can prevent malicious information being added to the chain.
If we talk about Bitcoin, each block stores transactions which go from point A to point B. That is basically Bitcoin, a public network which stores a database of transactions.
Regarding other cryptocurrencies, their blockchains can store things like legal contracts, inventories and others, but Bitcoin stores transactions.
But let’s dive a little deeper into Bitcoin’s blockchain.
The purpose of Bitcoin is to provide a Decentralized, Transparent and Trustworthy way of transferring and storing money.
Let’s start with the decentralization part:
As I said, Bitcoin is just a specific type of database that stores every Bitcoin transaction ever made. This database is distributed between a large set of computers, and these computers aren’t usually managed by the same person or group of people. This way, we do have the blockchain distributed in different geographic locations around the world. And the fun part is that as the Bitcoin protocol is open source, ANYONE who wants to contribute to the Bitcoin blockchain can do it just by running their own node in their computer!
Apart from contributing to the network, if you run a node you can have your own wallet there, which is kinda cool!
A node is just another point of the network, where all the network transactions get stored and verified. If one node has an error in its data it can use the thousands of other nodes as a reference point to correct itself. This way, no one node within the network can alter information held within it. Because of this, the history of transactions in each block that make up Bitcoin’s blockchain is irreversible.
If one user want to change the data stored in one transaction, all other nodes will just automatically say “Hey! That’s not what it says in my data”, and the malicious activity will get discarded.
This ensures that the whole blockchain acts in the interest of the majority.
Once you understand the decentralized nature of Bitcoin , it’s much easier to understand its transparency. Each node stores a copy of all the information that has ever gone through the blockchain, so anyone running a node can see the source and destination of the transactions, and this way they can be easily tracked.
Also you can make use of websites that track blockchain transactions in case you do not run a node.
This brings us to question ourselves why governments are talking about Bitcoin being the “criminals money”, if transactions can be easily tracked, but we won’t cover this topic in this article.
Alright, we are heading to the last part. Why is Blockchain Technology secure?
Let’s think on how does the blockchain add their blocks to the chain.
New blocks are stored linearly and chronologically, so they are added at the “end” of the chain. This means that it’s really difficult to go back to a previous block than the last one and alter its data, unless a general consensus is reached.
The difficulty lies in how blocks are stored with a unique identifier. This unique identifier is called a hash.
Hashes are mathematical functions that turns digital information into a random string of numbers and letters. If the information inside the hash changes, the hash itself gets changed too.
Let’s put an example to understand why that’s important to security:
Imagine someone wants to alter the data stored inside a block, to move a transaction destination to their own wallet. Once all the other nodes from the network compare their hash to the one that has been altered, they would see a hash standing out from all the other ones, and the network would automatically discard the transaction that altered it.
The only way to succeed with such a hack would be to control the 51% of the nodes of the network, and here comes a really interesting insight.
Everything can be hacked in some way or another. The only way to prevent something being hacked, is to make that hack a nonsense.
Once someone hacks the 51% of the network, thanks to it being public, the remaining 49% will be able to see it, and as you know, if no one wants the 49% of the network, that network stops having a real value, and so forth, the hacker will own a 51% of a non-valuable network.
Apart, the hacker would have to spend HUGE amounts of time and energy (and so forth, money) to change a single transaction. Here is were we find an explanation on WHY Bitcoin does not use PoS. But that’s another story. In case you are interested in it, contact me and we can discuss further about PoW vs PoS.
Blockchain & Bitcoin history:
Blockchain even if it doesn’t seem so, was invented around 1990s, but it wasn’t until 2009 that it found it’s first real-world application: Bitcoin, created originally by Satoshi Nakamoto, who no one still knows who he is.
And this first blockchain application was designed to work as Satoshi said: “a new electronic cash system that’s fully peer-to-peer, with no trusted third party.”
But as you now know, blockchain can be used in many different ways, not only implementing money system payments, but also election records, logistic procedures, legal transactions, and many more that are yet to be discovered.
Woooah this is getting to an end, and all that information was hard to digest, I know, but I hope you do better understand now how does Blockchain Technology and Bitcoin transactions work.
I hope you liked this article, I just want to say thank you if you reached this far!
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Thanks for reading!