A foundational technology of Bitcoin and other digital currencies is the blockchain. The blockchain is a critical, yet often overlooked aspect of digital currency, yet without it, Bitcoin or any other alternate currency would not exist.
Let’s consider the way a typical bitcoin transaction works as shown within the following diagram from The Age of Cryptocurrency:
As shown, a typical Bitcoin transaction consists of the following activities:
-Transaction broadcast to miners
-Miners package the transaction, with others in a block
-Miners race to solve the difficult mathematical puzzle
-Winning miner seals off a completed block of transactions and broadcasts his or her proof of work to the network
-Other miners check the proof of work and confirm the authenticity of the block
-The new block of confirmed transactions becomes the latest installment in the ever-growing blockchain
Another simplified example of the Bitcoin transaction process is provided within the book Digital Gold by Nathaniel Popper. Within this example, the name Alice is used to designate the person initiating the transaction which is standard parlance within the cryptography field. This process is broken down into five steps:
-Alice initiates a transfer of Bitcoins from her account by signing off with her private key and broadcasting the transaction to other users
-The other users of the network make sure Alice’s Bitcoin address has sufficient funds and then add Alice’s transaction to a list of other recent transactions, known as a block.
-Computers take part in a computational race to have their list of transactions, or block, added to the blockchain.
-The computer that has its block added to the blockchain is also granted a bundle of new Bitcoins.
-Computers on the network start compiling a new list of unconfirmed recent transactions, trying to win the next bundle of Bitcoins.
The blockchain is one long, unbreakable record of activity of hashed blocks.
The blockchain is essentially a public ledger and is the component within the system that allows for Bitcoin and other cryptocurrencies to avoid the need to use a trusted third party (such as a bank); this feature is why Bitcoin is sometimes referred to as a trustless system.
An interesting example of this distinction is provided within The Age of Cryptocurrency. The authors provide the analogy of someone making an announcement within the town square when they make a purchase. Everyone present confirms the spending of the funds and acts as a means of preventing what is referred to as double spending. This is basically how the blockchain works. Someone announces a transaction, and those present within the Bitcoin network confirm the transaction has taken place. Once confirmed, it is entered into the public ledger, or blockchain within an individual block of transactions.
Another intriguing aspect of the blockchain is that because it is meant to be a public ledger, anyone can view it at any time. The following image is a screen capture of the latest transactions from the Bitcoin blockchain as reported by Blockchain.info:
The preceding shows the latest transaction as represented in terms of the individual hash, the elapsed time since the transaction occurred, and the amount of Bitcoin transferred. This is in my opinion one of the coolest features of Bitcoin – the ability to see authentic transactions in near real-time. This literally shows that money is moving around the world at each moment, in essence, a brief capture of the global Bitcoin economy.
This article serves as a very simplistic overview of the Bitcoin blockchain. For a more detailed description of each aspect of the Bitcoin blockchain refer to The Age of Cryptocurrency by Paul Vigna and Michael J. Casey.
Image Credit: Blockchain.info