Blockchain and Bitcoin for Normal People with a Chain of Simple Questions
What is blockchain?
It is .. well a chain of blocks consisting data, a kind of database. It is created to be used in Bitcoin, by a genius or a group of geniuses who call themselves Satoshi Nakamoto. It is public and shared across servers.
How are the blocks chained to each other?
Block is simply an object with some data. Every each of one has it’s own hash string created with previous ones hash string. So when someone replaces a block on a chain, its next block’s hash becomes incorrect and chain gets broken and becomes invalid.
Where does this hash come from?
It is created with some sophisticated hashing algorithms using the components of the block itself. This makes blocks in a chain immutable.
What are block’s components?
Block’s components are its number on the chain, previous block’s hash, transactions or some data, its own hash and another hash called nonce which is used to reward miners.
What is a transactions?
A transaction has 4 components. Sender address, receiver address, amount and time. When you want to buy some bitcoin from your friend this becomes a transaction in the last block of bitcoin’s blockchain (well not immediately). Your friend’s wallet address becomes sender address, your wallet address becomes receiver address and the amount of bitcoin is amount in transaction.
What is a wallet?
It is technically not a wallet because it doesn’t hold any of your transactions or your coins. It is just a public, unique and alphanumeric string. It helps chain to keep track of everybody’s transactions. Basically it is a key in the chain that represents you.
Everybody knows my wallet address, what if they spend my coins?
It is impossible because when you create a wallet address you create two keys. One is public, wallet address. Other one is private for you. You sign every transaction request with this private key. When the request data and your public key reaches to a node in the ecosystem, it gets checked if data and wallet address matches each other. That means no one can send a transaction request behalf of you unless they know your private key.
What is a node and ecosystem?
Some people hold this blocks of chain data at their servers with a proper internet connection. You can too if you want. Every one of these holders is a node and whole thing is the ecosystem.
Why are they doing this? It might cost a lot of money
Because they are miners. And miners earn coins for their efforts taking some transactions and turning them into a block. But to do this they need to predict a hash called nonce. This is a pretty power consuming concept and called proof of work. When nonce is found the block is completed and gets bonded to the chain. Longest chain in the ecosystem is the most correct one and every node keeps updating their own chain data. Finally the miner who finds the nonce gets rewarded for its efforts with some bitcoins.
Who is paying the rewards?
Nobody, it is just a part of the algorithm, like a bank printing money. Bitcoin is limited to produce only 21 million coins so this is the limit for rewards.
That’s it. I would like to end with this awesome video by Anders Brownworth explaining how blocks are immutable and how hashing works. Thanks for reading.
