Part 2. What is a blockchain?
The blockchain 🔗
The blockchain cannot be described just as a revolution. It is a tsunami-like phenomenon, slowly advancing and gradually enveloping everything along its way by the force of its progression. 🌊
– William Mogayar
Skip the basics? Jump directly to How to buy Bitcoin in three minutes!⚡️
The blockchain is the underlying technology that Bitcoin and almost all other cryptocurrencies are built on top. Simply described it could be seen as a database stored not just in one server hall but on computers distributed across the whole globe. But Facebook’s huge data centers are spread across the worlds as well, so what makes the blockchain different?
A blockchain is, in fact, a decentralized ledger. This means that no single person, state, company or central bank owns or controls the database. Not just that, but nothing that one has entered the blockchain can never be removed as long as someone keeps a copy of the blockchain.
The blockchain is made out of linked blocks that contains several different kinds of data but mainly it keeps a list of transactions that have been broadcasted out to the network by users. The size of a block limits how many transactions it can fit and it varies depending on the protocol and blockchain but for Bitcoin, it’s set to 1 MB each. By storing all transactions ever made we can keep track of which bitcoins belongs to what address making it impossible for someone to spend coins they don’t own or spend them twice. This means that the blockchain always needs to be stored in full, growing in size with every new transaction being added. The computers keeping track of and storing the blockchain are called nodes and the whole ledger is maintained by constantly being broadcasted between all the nodes making sure that everyone has the correct version.
How is a block created? ⛏
Here is where the so-called “miners” enter the picture. The creation of new blocks can be solved in a few different ways but the most common and the one Bitcoin uses is called Proof-of-work. The miner, which is a computer, tries to solve a very complex problem by using its graphical card or processor. Simply put the problem consists of trying to find a certain long string called a hash. The first one to find the correct string wins the right to add the new block to the blockchain and by doing that earns bitcoins that are created by the miner. This is also the only way that new coins enter the system and at the moment the so-called “block-reward” is at 12.5 bitcoins but it get’s cut in half every 210,000 blocks until all the 21M bitcoins have been minted.
The hash that the miners are trying to find is very central to cryptography and created through what’s called a hash function. This hash works so well since it’s easily verifiable but extremely hard to generate. A single change of a letter in the string will also generate a completely other hash making it impossible to modify the data without also getting a new hash. This actually makes up most of the security on the internet, for example, keeping our passwords safe. And it is also what made the blockchain possible in the first place since every new block contains the hashes of all the blocks that came before it we can easily verify that no one has modified the data in any of the blocks as long as the hash is intact. This is done by all the nodes in the network before the new block is added to the blockchain and thereby maintaining the authenticity of the chain. If a miner would try to add a block with the wrong hash it would get rejected by the nodes and the next miner in line would be picked instead. And since the miners invest a lot of money in equipment and energy to run their computers this creates an incentive for them to follow the rules instead of trying to cheat.
Another rule that the exists on the blockchain was created to handle the cases when conflicts happen for example when two miners find a new block at the same time actually creating a split in the chain. When that happens the rule states that the longest chain is the correct one that the miners should start working on. With that said we get into our next topic, the 51% attack.
51% attack 💪
If someone with more than 51% of the computational power in the network would want to hurt the blockchain they would be able to control what transactions that get’s put in the blocks or even be able to redirect them to themselves. As we mentioned before the longest chain is seen as the correct one but if someone with bad intent with the majority of the hash power, (amount of hashes that are calculated), they would be able to build the longest chain. However, this is highly unlikely since they would be incentivized to simply use all their computing power to follow the rules and receive the block-reward instead. Attacking the blockchain would also drastically hurt the coins value making the coins they potentially could steal worth a lot less. This is the potential danger with centralized mining where the actors can collude, but with the case of Bitcoin an event like this is highly unlikely.
This type of conflicts is also one of the mains reason you are recommended to wait a couple blocks after you send or receive a large transaction to make sure it wouldn’t get thrown out in the case of an attack.
Last words on the blockchain
In this part, we’ve only scratched the surface of the blockchain technology simplifying a lot of the details which leaves us with much more to dive deeper into in future articles you will be able to read here on CoinSpecto in the future. Worth noting is that we’ve only talked about blockchains use case for doing transactions but its potential is far greater than simply doing that. Other blockchains like Ethereums store and run so-called decentralized applications, DAPPS, running instead of a single server on thousands of computers all across the globe, like a massive world-computer. But more on this later!
Now you’ve got a better understanding of Bitcoin and the blockchain than probably 99% of the world. But it’s pretty boring to be the only one in your surrounding that has a clue about cryptos, so make sure to share this Beginner Guide to friends and family so they also can keep up with this financial revolution. 🚀
In the next part of the Bitcoin Beginner Guide you’ll find out how to make your first investment into crypto-currencies, hope you are ready!