Bitcoin and the Blockchain 101

This article appeared in print edition 5.1 of yBitcoin. Click here to see the full issue. Click here to order your copy.

Increasingly leading a life outside of cryptocurrency, blockchain technology has generated hype in all sizes and shapes. Open or private, permissioned or permissionless, many with their own consensus algorithms, and some even developed or supported by well-known companies in the technology and finance sectors, the array of blockchain applications and solutions is exploding at a pace that’s hard to keep up with.

But the concept of a blockchain originated, of course, with Bitcoin. And unbeknownst to many adopters, Bitcoin’s original blockchain provides advantages that no alternative system does.

To understand why, let’s first look at what a blockchain actually is.

Underlying Technology

The “block” aspect of a blockchain refers to blocks of data. In Bitcoin, these blocks are bundles of currency transactions, as well as some additional information about the blocks themselves, like the time at which they were mined.

Each of these blocks is “hashed,” meaning that it’s scrambled and condensed into a compact and seemingly random string of numbers. And this string of numbers is then included in the next block. This next block is in turn hashed as well, and this hash is included in the block after that. This links all blocks together, creating a chain.

All of these blocks are shared over a network of computers, which all verify the integrity of a new block and its contents, and reconstruct the blockchain from it. Since all of these computers apply the exact same protocol rules, they all reconstruct the exact same blockchain. As such, the entire Bitcoin network reaches consensus over the state of the blockchain, a state which is updated about once every 10 minutes as a new block is found. 

Crucially, this consensus is reached without the need for a central intermediary. Bitcoin’s decentralized nature — in which tens of thousands of peers reconstruct the blockchain themselves — helps make the blockchain relatively censorship-resistant.

Furthermore, the network doesn’t only achieve consensus every 10 minutes. It also ossifies the history of consensus. Because the unique identifier of each block — the hash — is included in the next block, all blocks are not just linked but also ordered chronologically.

In Bitcoin, changing what older blocks look like, by removing transactions, for example, is impossible. Due to specific mathematical requirements, the changed blocks would be entirely rejected by the system. The only way to rewrite history, therefore, is to create a whole new chain of blocks.

The Original Blockchain

In many blockchains, it isn’t actually that hard to create whole new blocks and potentially rewrite history. But in Bitcoin, due to a requirement called “proof of work” and the fact that bitcoin is the most valuable of all cryptocurrencies, creating new blocks is very computationally expensive. It requires dedicated hardware, a certain expertise and, most of all, lots and lots of energy.

To change history, then, requires an attacker to reinvest all of the energy that has been invested in Bitcoin’s blockchain from the point in history that needs to be changed. Depending on how much hash power a potential attacker has available, this is either very expensive or downright impossible.

The costs involved in changing the data is what makes the Bitcoin blockchain the most robust, immutable and chronologically sound chain of transaction data the world has ever seen. It’s a historical ledger of all transactions that ever took place.

The Blockchain — Beyond Bitcoin

Interestingly, this doesn’t have to end with transaction data. As a global, censorship-resistant consensus system, Bitcoin’s blockchain potentially allows for much more.

Transactions don’t really have to be used solely to transfer bitcoins. Instead, special software can be connected to the Bitcoin blockchain that interprets this basic transaction data a bit differently.

As a simple example, a fraction of a bitcoin — potentially worth less than a cent — could represent something else entirely. Perhaps that fraction of a bitcoin can represent stock in a company. Or a piece of gold locked up in a safe. Or even a U.S. dollar in a bank account. Whoever then owns the “colored coin,” as this fraction of a bitcoin is called, has a claim on the underlying property. And as long as other participants recognize the claim, the Bitcoin blockchain — with its unique properties — all of a sudden carries much more than just bitcoins: it carries stocks, gold or dollars.

There are many other unique properties that continue to prove that Bitcoin’s blockchain is a standout player, even as the concept of blockchain technology takes off in countless industries. The Bitcoin blockchain as a global, censorship-resistant and immutable consensus database is a very powerful tool. And much like the internet itself, it is working today, ready and free to be used by anyone.