Blockchain Basics And Bitcoin

A lot of you heard about Blockchain and Bitcoin and other cryptocurrencies, But a lot of people do not know what exactly is Blockchain. In this article, You are going to learn everything you need to know about blockchain and Bitcoin.

What is Blockchain?

A Blockchain is a growing list of records, called blocks, that are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. By design, a blockchain is resistant to the modification of data.

well, that’s kind of fuzzy right. Let me explain it simply using an example. Let’s imagine some friends are getting together to play a poker game and one of your friends supposed to bring poker chips but he forgot.

So they decided not to cancel the game and they came up with a different idea to play the game. Everybody takes a sheet of paper and they decided to sign poker chips and every hand that they play they are going to record on their sheet of paper and at the end make sure everything matches up.

So think about a friend who tried to cheat, But the remaining friends all have the record also, so they can easily eliminate the cheater. So more friends we have played the game the more accurate the system will be. That’s essentially a blockchain public ledger it's just people keeping track of different transactions.

I think everyone got the basic idea of what blockchain is, so where did it come from? The technology is first used in Bitcoin which is the first digital currency, simply we can tell the first application of blockchain is bitcoin. So if we know how bitcoin works we will get an idea of how much power this technology has.

WHAT IS BITCOIN?

Bitcoin is a cryptocurrency. It is a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.

This all came from this white paper which was released on October 31st, 2008 by an anonymous name Satoshi Nakamoto. You can read the full white paper provided in the link below.

Bitcoin A Peer To Peer Electronic Cash System

To understand how bitcoin works, you should simply understand the transaction life cycle of bitcoin. In the end, everything stored in the blockchain is a transaction.

THE TRANSACTION LIFE CYCLE

1. Someone requests a transaction via wallet.
2. the transaction is broadcast to all participating computers in the specific blockchain network.
3. Every computer in the network validates the transaction against some rules that are set by the creators of a specific network.
4. The validated transactions are stored in a block and are sealed with a lock(hash).
5. This block becomes part of the blockchain when other computers in the network validate if the lock on the block is correct.
6. Now the transaction is in the blockchain and cannot be altered in any way.

This image shows an overview of the transaction life cycle.

So let me explain these steps in much more detail.

In general think of sending money to your friend. What process will be done,

First, you open your wallet checks how much money you have in your wallet, and give some amount to your friend. This transaction is also called peer-to-peer transactions but physically. For this transaction, you don't need to rely upon banks or any third party, you are free to send how much money you want to your friend. But think about the scenario in which your friend is not available physically to make a transaction. That's where banks came into place and they act as middlemen to operate your transactions. You should pay taxes and you even don't know where your money is when you deposit them in a bank. So if we want to transfer assets peer-to-peer without any intermediaries digitally you can use Bitcoin. No one controls your money you hold your money in your wallet protecting your private key.

So if you see in the picture above Rob wants to send 0.3 Bitcoin to his friend Laura, You can look at the sequence of steps on how laura is going to receive 0.3 BTC.

step 1: Rob opens his wallet, think of a wallet like your bank account. He scans or enters Laura’s address (think address in here as Bank Account No.).

step2: He fills the amount of bitcoin to send(in this case 0.3) and fills the how much fee he is going to pay(we will talk about the fee in much more detail later in these steps.) and he presses the send button.

That's it Rob’s job is completed here. So what happens next.

step3: Every address in your wallet has a pair of keys(Public key and Private key). Think private key as your ATM pin code(which cannot be shared with anyone, if you lose your private key you lost your funds). Technically public key is generated from the private key and the address is generated from the public key. I am not going to dive into these cryptography concepts just remember these keys. After rob presses the send button the wallet signs the transaction using Rob’s private key(means the transaction is sent by Rob only, this can be verified using rob’s public key which is public to everyone.).

step4: After signing the transaction it will be broadcasted in the network(In this case bitcoin network) and validated by all nodes.

step5: Now these transactions broadcasted in the network all are collected and stored in Mempoll by a set of nodes called MINERS. Miners are those who add the transactions to the blockchain. Wait a minute? I previously told that there will be no intermediaries while making a transaction. But in the end, we should see one public ledger of transactions right. So the beauty of decentralization is anyone in the network can become a miner. So there will be a lot of miners right, so who will have access to append a block in one single public ledger? So a miner to append a block in the blockchain should solve a mathematical puzzle that takes computation power to prove that their answer is right. This process is called proof-of-work(one of the consensus algorithms) if a miner can show his proof first. He can add the block to the blockchain. So for doing this process, a miner is rewarded with Bitcoin(in this case 6.25 BTC).

step6: So the block is first validated by all other nodes before appending to the blockchain. If it is a valid block it will be agreed and if not it will be rejected and the miner will not get the reward(In this case the miner will intend to mine valid transactions so that he doesn’t waste his computation power). In the mining process, new bitcoins are generated.

step7: Once the block containing the transaction is added to the blockchain, Laura can see the confirmation of 0.3 BTC.

So we talked about new bitcoins are generated by mining, Every currency should have a limit if not there will be inflation. In bitcoin, the limit is 21 million bitcoins. For every 4 years (approximately) the reward of the miner will be halved (this is called bitcoin halving). After generating 21 million bitcoins the miners will not be rewarded. But there will be an increase in transaction fees for the miner(which will be negligible when compared to the value of the asset).

I will highly encourage you to read the Bitcoin white paper to understand the concepts in-depth and clear.

Bitcoin A Peer To Peer Electronic Cash System

So I hope you understand what Blockchain is and what is Bitcoin and how it works.