Blockchain Explained
Blockchain can be considered as a transparent, public, and append-only ledger. It means that in a blockchain, new nodes (data) can be added, and the existing nodes cannot be altered. It is done by creating consensus between distributed parties who do not need to trust each other but must trust the mechanism through which their agreement has arrived. In simple words, nobody can force data into a blockchain on which others disagree as the verifiers of a blockchain (often called miners) are chosen in a randomized fashion. Thus, making this network secure.
Now, let us take an example. Bob wants to transfer $100 to Sam. He does this simply by transferring the money to Sam’s bank account. Now, let’s see what happened in the backend. First, Bob’s bank verified if he possessed $100 or not, after which there was a debit entry in his bank account ledger, and after a time lag, a credit entry in Sam’s bank account ledger. This process usually takes time to occur and is expensive for the banks as there are so many checks involved, so in theory, a small percentage of that $100 is taken as a transaction cost. Now, if there was just one publicly available ledger, and all the transactions around the globe are appended into it. Then, when Bob sends $100 to Sam, a bunch of computers verifies if Bob possesses that $100 or not, after which there’s a public entry in the ledger that Bob transferred $100 (or 100 crypto coins) to Sam and as this record is publicly available, there are almost no chances of discrepancy. This process has no middlemen (banks) involved, resulting in negligible transaction rates, and is much quicker and more secure than the traditional banking system.
Now, let’s dive deep and see what blockchain exactly is at its core. As the name suggests, it is composed of blocks that are tethered via a single chain. The block in blockchain consists of three parts — data, hash value, and previous hash value. The ‘data’ represents the information that the block is carrying, ‘hash’ is a function that generates random alphanumeric codes; it can be considered as a security key. An interesting fact about hash is that it changes its value with the data. So, if somebody tries to manipulate the data in a block, the hash value will also change along with it, and lastly, ‘previous hash value’ stores the hash key of the previous block. So, to defraud the blockchain network, one has to alter all the nodes present in the chain, for perspective, a blockchain network can potentially have millions of nodes, and hundreds of nodes are appended to it every minute, so it potentially becomes impossible for a hacker to hack into this system.
Understanding the Bitcoin Blockchain
The Bitcoin Blockchain was invented by a person (or a group of people) using the name Satoshi Nakamoto in 2008 to serve as the public translation ledger of the cryptocurrency — Bitcoin (or BTC). It was the first digital currency to solve the double-spending problem (usage of the same digital token for multiple transactions) without the need for a central authority. If you hold any Bitcoin, what you really have is a private key which consists of two parts: a digital signature that certifies you own a specific Bitcoin and a public key. A record of a public key is stored in the blockchain. Individual blocks contain multiple transactions, each of which refers to an early record in the chain. When you want to purchase something with Bitcoin, you broadcast a request. This request is received by all the computers on the Bitcoin peer-to-peer network. These computers and their owners are called miners. Miners scoop up the most recent request into a block and run the new block along with the existing old blocks through a set of calculations known as the hash function. It is a competition with all the miners competing to solve a complex cryptographic puzzle, the more computing power you have, the more likely you are to solve it first. After solving a block, the miner appends it to the end of the blockchain and then they broadcast it to their peers who check the work and start using the new version of the blockchain. The first miner to solve the problem is rewarded with some newly minted Bitcoin. Now just imagine, how much electricity would be wasted by all the other miners who failed to solve the puzzle first. Bitcoin miners around the globe use around 100TWh (1TWh = 10^12 Wh) of electricity per year, for perspective, that’s the same amount of electricity used in the whole of Argentina and this number is likely to go up every year.
Another interesting fact about Bitcoin is that there will ever be just 22 million Bitcoin in the world, unlike other currencies, which are minted daily, which is one of the reasons for the surge in Bitcoin prices. Just to mess with you a little bit, the price of 1 BTC was around $100 back in 2013 and is currently trading at $58,000 in 2021, that is a whopping 580X on your investment. It means, if you would have invested just $1000 then, you would have around $580,000 by now. You could have retired financially. Sounds fascinating right? But it isn’t that easy as it seems. Some people have lost millions in Bitcoin owing to its volatile nature, so don’t feel left out!
