When the subject is bitcoin, another word attracts the attention of newcomers: blockchain. This technology has been sold as the cure for all humanity’s ills. It is, in fact, a revolutionary technology whose knowledge is essential for those who want to understand how bitcoin works. But what is blockchain and how can it be used?
What exactly is blockchain?
The term blockchain is a recent creation, even more so than the technology itself. When Satoshi Nakamoto created bitcoin, he did not mention the term blockchain in the white paper. The technology was explained in great detail, but no name was given. Once it was understood that bitcoin worked as a blockchain, the term started to be used.
Because of the confusion surrounding the subject, many people see blockchain as a solution to problems that it does not solve. In this text, you will understand what the technology is and how it works. And, of course, discover that it’s not as complex as it seems.
An easy-to-understand definition of blockchain
Essentially, blockchain is a very simple tool. It’s nothing more than the digital version of a ledger, like those used in notary’s offices. However, there are two differences. The first is that the blockchain ledger is entirely digital. The second is that it can be controlled by several people at the same time.
Ledgers record all the transactions that take place in a company or a notary’s office, for example. The blockchain, on the other hand, records all transactions that take place with a particular cryptocurrency. The Bitcoin blockchain records transactions carried out in Bitcoin, the Ethereum blockchain records transactions carried out in Ether (ETH), and so on. Among the data recorded in each transaction on the blockchain are:
Amount of cryptocurrency transactions ;
Who sent and who received the transaction;
Date and time at which the transaction was carried out;
Number (height) of the block where the transaction was recorded;
Hash number confirming the authenticity of each transaction.
It is important to note that the blockchain identifies who sent and received a transaction thanks to the wallet addresses. However, the network does not provide the names or documents of the parties involved. In this way, the blockchain manages to be both public (since all records are open) and pseudonymous (by preserving the true identity).
How are blockchain transactions carried out?
Each transaction is stored in the blockchain in a specific block. As the text on bitcoin mining shows, blocks are created every period of time – in bitcoin, that’s about 10 minutes. So every transaction made on the blockchain during that period is included in that block.
Information about a Bitcoin transaction on the blockchain
After an average period of 10 minutes, all the transactions are combined into a single block. This block is then transmitted to the network through the mining process by the miner who discovered it. Each block has a hash number that identifies it and lets the other participants in the network know that the block is legitimate and has not been tampered with.
The hash is nothing more than a sequence of letters and numbers. For example, 00000000000000000000000000007aa242ddd2bb91add3ca0cb43b4500451378a6eb37d99 is the hash of block #670151 on the Bitcoin network. In addition, each block contains the hash of the block that precedes it.
This allows miners to check that the network sequence is being followed correctly. Blocks therefore contain information about your transactions as well as your hash and the hash of the previous block. In this way, the network forms a long unbroken chain of blocks (in the original, blockchain).
How blockchain works
By containing two hashes, the blockchain becomes extremely secure. Indeed, if someone wanted to defraud the network, they would have to defraud not only the block in question, but also the previous blocks. Meanwhile, the computing power of all the miners and nodes on the network would be concentrated on resolving the correct chain.
When a block is mined and contains the hash of the previous block, it becomes easier to identify the fraud. A block that does not display the hash of its predecessor will not be recognised by the network. As a result, it is immediately eliminated from the system, becoming an orphan block, and the miner who attempted the fraud will have wasted his energy for nothing.
Decentralisation of the blockchain
For this whole process to work, the blockchain relies on a structure of tens of thousands of computers spread around the world. These computers have no relationship with each other and are not linked by a network or a centralised server. They have three main functions:
Validate transactions on the network and verify blocks;
Find blocks and communicate them to the rest of the network;
Alert against fraud attempts in the system.
Validating transactions and blocks is the responsibility of the complete nodes. Becoming a network node does not require a large investment: all you need is a computer with a large enough hard drive to download and store the Bitcoin blockchain. Currently, the Bitcoin blockchain is around 320 gigabytes (GB) in size.
Evolution of the size of the bitcoin blockchain
The creation and discovery of blocks, on the other hand, are the responsibility of miners. They solve the mathematical problems that lead to the discovery of hashes. This work involves the use of enormous computing power and therefore energy. This is why miners are rewarded with bitcoins when they discover the blocks.
Miners and nodes are scattered around the world. What’s more, the network has no central server, with each node operating as a small server. So if a node, a miner or a group of nodes and miners goes down, the network will not collapse. It will simply adapt to the loss, but it will not cease to exist.
Is blockchain technology secure?
Yes. Since its creation on 3 January 2009, the Bitcoin blockchain has suffered several attempted attacks. However, none of them has succeeded. Today, the network operates 24 hours a day, 7 days a week, without any problems or hiccups. Its high degree of decentralisation makes it almost impossible for an attack to succeed.
What’s more, bitcoin now has around 165 million terachashes per second (TH/s). That’s more computing power than all the Google servers put together. If someone wanted to take control of the network, they would need to obtain at least 50% + 1 of all that power, which is not only expensive, but also extremely unlikely.
But you might ask: I’ve heard or read of people having their cryptocurrencies stolen. Yes, it’s still very common. However, these cases usually involve other factors, whether it’s personal error or other systems. The main vectors of cryptocurrency theft are:
Errors when storing passwords (private keys) in the wallet ;
Theft from platforms external to the blockchain (such as exchanges and wallets) ;
Viruses and malware that infect the user’s computer;
Malware that steals access to wallets.
Blockchain applications
Blockchain has become a revolutionary technology. Its first practical application was the creation of cryptocurrencies. However, people and businesses quickly discovered that its use could be extended to various sectors of the economy.
One of the most famous examples of the use of blockchain is document authentication. As the tool provides accurate data, it can be used to create digital signatures that identify when a particular document was created or collected. This has enormous potential for preventing fraud and the falsification of evidence and other sensitive content.
The blockchain can also be used for property records (such as real estate, shares and chattels), financial transactions, music and book copyrights, and even to record votes in elections. In Brazil, the startup OriginalMy, founded in 2015, is one of the biggest success stories in the use of blockchain in these areas.
In short, blockchain technology has brought many promising benefits for the future. However, it still has a long way to go to prove that it is reliable. And just like building a house, this will be done by putting in one block at a time.
