The Blockchain is the basis of the utility of Bitcoin. Many experts agree that if it weren’t for the Blockchain, Bitcoin would have little appeal and value. To really understand the benefits of Bitcoin, you need to understand how the Blockchain works, and by learning this, you can then proceed to understand how the mining process works. The Blockchain is made up of a number of elements that you need to know individually before putting them together and understanding the whole thing.
The entire Bitcoin ecosystem is really the Blockchain. That is the genius of the system. As you can see, the coin is nonexistent imagery – or objectification of a transaction. It’s the right conferred on a person to acquire something for something. The value of that something is then transmitted to the next person in return for something of value. We’ve seen that and we understand that it is just a messaging system that goes from one person to the next and is witnessed by the community.
Underneath the messaging system is a network that is built across a peer-to-peer network. The messaging system would not be of any use if you were to use regular emails. Why?
Nodes
Because the messaging system needs to be robust and not controllable by any one party, it is spread across a peer-to-peer network. If you used a typical email network as the system, then you leave yourself vulnerable to cracks in the system since it is a server-client relationship across the email network. Instead, Bitcoin uses nodes in a peer network in a distributed system that removes central control, and thereby the possibility of a failure point, from the equation.
Each peer in the network is called a node and each node in the Bitcoin network does one of three things. They either originate or receive transactions in the Bitcoin network, verify a transaction, or become miners.
For now, let us look at the node and understand its functions, aside from mining. A node is just a computer connected to the internet and has the necessary application to do whatever it needs to do. In this Bitcoin instance, the app is the Bitcoin (that is not a spelling error – the app underlying the node is called Bitcoin) that contains all the software, written in C++.
Within each node, it opens up a specific port and disallows anyone from using the node entry to gain access to any parts of the computer. Once the app is established and activated, it turns the computer into a fully functioning node and it can then choose one of two states. The first state is to be a full node and the other is to be a lite node.
A full node is one that downloads the entire ledger, but the lite one only downloads parts of the ledger that pertain to the coins which are relevant to that address.
Ledger
It’s time to look at what a ledger is and how it works. A ledger is a large repository of all the owners of the coins in the Bitcoin system, as well as the trace of transactions that have happened over the course of time from the first day Bitcoin existed. It is worthwhile to remember that there is no actual coin or physical object. There is only a message that transfers value from the Bitcoin system to the miner (which is the first to receive any new coin). When the miner initiates a transaction, he sends a message. The ledger is best visualized as a big book, though it’s not. It just keeps a track of how a particular coin has been spent all the way back to its original block.
A typical coin starts its life when it is awarded to the miner. then that transaction is recorded in the ledger and confers the right to the miner to spend x amount of coins. Let’s say that is 25 coins (it’s not anymore but this is just an example). The ledger then records that message from the system and keeps a note that the miner can spend 25 coins. When he spends 1 BTC, the ledger makes a note of which address that BTC is going to, and now keeps count that this address has 1BTC to spend. If that person decides to spend 0.01 BTC, then the ledger makes note of that and records the address where that 0.01 BTC went.
The ledger is electronic and is stored in full nodes. Partial ledgers are stored in lite nodes. As we said earlier, this partial ledger only stores information of the BTC that it has in its address and where it came from all the way back to the block that it originated from, with the miner that received it. So, let’s say you have set up your node to be a lite one and have some coins in it. Then all the transaction history of those coins, all the way back to the coin released by the system and up to the point you own it, will be in the ledger on your node.
The reason full nodes and lite nodes exist is to enable those with limited storage to use Bitcoin and be a part of the network without burdening the system. On the other hand, a full node, while taking up large storage space, is also involved in verifying transactions by looking into its transaction history, i.e., the ledger, and making sure there are enough funds available for the transaction.
Bitcoin is actually facing a bit of a problem these days because most users are not willing to load up on the full node and are only using partial nodes. When it comes to keeping integrity, that can be a real problem and it could end up inadvertently being party to multiple forks down the road. Possibly even a catastrophic double-spending problem – or at worst – outright fraud.
At this point, we want it makes it absolutely clear that the online world has taken for granted the explanation of the entire Bitcoin structure and existence. People think that a cryptographic coin exists in tangible or electronic terms. It does not. That coin is merely an analogy for the exchange of value. Remember each transaction can be broken down to as small as 0.00000001BTC (1 Satoshi). If a coin existed in physical form, then it would have to be made up of a million tiny coins to make up one coin. The same for its electronic counterpart.
This is one way to come to the realization that a full coin in hard or soft terms does not exist. It exists when someone gives it to you. Look at it this way, if we sent you a valid message saying that we are transferring 1BTC to you and you now own 1 BTC, that would show in your account balance, (assuming no transaction fees for this illustration). If you decided to send 100 million addresses 1 Satoshi each, the transactions would go through, but if they were part of a coin, how would you break that up? You couldn’t, could you?
That’s the point where most attempted explanations on the web break down. There is no physical or intangible coin wrapped in a serial number. It’s all just tracks of transactions. It exists only because someone gave it to you, and someone gave it to them, and someone before that gave it and so on… all the way back to the point when the system awarded the miner the bounty for its mining operations.
That’s how it works, and all this is kept in the ledger. The ledger is tied up in blocks and the blocks are mined by the miners. Copies of these blocks are kept on every full node. This makes it decentralized and almost indestructible. It also makes it immutable. You can’t go back and change a transaction.
Now that you have the ledger and the nodes, let’s see how the Blockchain works.
Remember, at the heart of it, the Blockchain is a decentralized messaging system. It obviates the need for trust and allows all participants to keep track of all the transactions that are initiated in the messages.
As soon as you send Bob a message saying that you are sending him 1BTC, the message is shouted out via a gossip protocol and transmitted to the node next to you. That node you communicate with is a random node that is chosen from anywhere in the world. A handshake from your node to that node takes place and your message is transmitted, in the same way, your node transmits that to at least 6 other nodes.
All those are full nodes. Your node has a copy of the IPs that are running full nodes. Once you transmit to these six nodes, those ones then verify the transaction. Among other things, the nodes verify that the address which is sending that message has a sufficient balance to make such a payment. They verify that the public key is correct, and a number of other issues too.
Once all are good, they pass that transaction on in a gossip protocol where one node tells six or more, and each node after that does the same. There are currently between eight and twelve thousand nodes, depending on the time of day. If each relay jumps to six nodes, then within six jumps (65 = 7776 and 66 = 46656), that means that the message is broadcast to all the nodes in a fairly short time. But just because they have them doesn’t make it safe. There is the danger of double-spending.
Double Spending
In a system where you send messages to the recipient, what is stopping anyone from spending each coin more than once? You might think that a boon or a risk, depending on which side of the transaction you are on.
The system is a trust-neutral one so it does not leave any of the participants in a situation where they have to trust someone to get a payment. There is no need for that, as long as you get a payment, then it’s yours. This is how it works.
As soon as they broadcast a message to you and the nodes verify that there is a sufficient balance, that transaction is placed in a pool for the miners to place in blocks. If the nodes don’t verify your transaction for insufficient balances, then you will not be able to spend. But what if what you spent is not yet in a block, and you send out a new message making another payment from the funds you have already sent out?
In many cases that transaction will get sent to the nodes for verification as well. If it is verified and placed in a block, then the second transaction will have a problem because the nodes that are trying to verify your transaction will see that you no longer have the required balance to effect that transaction. So one of the transactions will get rejected. It does not depend on which you made first, it depends on which is placed in the block first. If you make a transaction at T1 and another at T3, if it happens that T3 is placed in a block first, then it is T1 that will not get verified. It will then be rejected. So if you are receiving payment from someone, wait until you get at least two or three confirmations.
Each confirmation you get is an additional block that is going over the one which contains your transaction. The more blocks that go on top of it, show that the transactions translate to the number of times they are confirmed. It takes an average of ten minutes to create and verify a block. It is fairly certain that after six blocks are created on top, meaning you get six confirmations, and an hour has passed (ten minutes per block x six blocks = one hour and six confirmations), it’s a pretty sure bet that your payment is valid and reliable. It doesn’t matter where the sender is from and where you are located.
Blocks and Blockchains
We are sure you have heard a lot about blocks and blockchains and you would have also probably read a lot about it all across the web. We sometimes hate to tell you this, but a lot of the information is wrong. There are some really good sites on the Internet that give you a detailed and esoteric rundown of the Blockchain, but most of the others, as we have mentioned, are far from being remotely accurate.
The Blockchain is the key ingredient in the Bitcoin network. Without the Blockchain, the Bitcoin transaction ledger would be virtually useless. It is the Blockchain that gives the transaction credibility and makes the entire system robust. What does it do? Or to get a better idea of the entire ecosystem, how does it do it?
To put it simply, a blockchain is a string of blocks that make up a chain. Each block is connected inextricably to the block that comes after it, and that block is then linked to the one which comes later. And so as time goes by, each block is tied to the other without the possibility of anyone going back in transaction history and changing the contents of the block. The way this works is why mining is necessary.
