Bitcoin Blockchain Cryptocurrency Basics And How They Work
In a computer network, a blockchain is a distributed database that is shared among all the computers. Blockchains act as databases in which information is electronically stored in digital form. The blockchain technology is perhaps best known for its crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions. With blockchain technology, the innovation is that it guarantees the fidelity and security of the data recorded and generates trust without the need for a third party.
A primary difference between a typical database and a blockchain is the structure of the data. Information on a blockchain is grouped into groups, known as blocks, which contain sets of data. The blocks contain a certain amount of storage capacity, and, when filled, they are sealed and linked to the previously filled blocks, forming a chain of data known as a blockchain. Upon the completion of the chain, all new information that follows the newly added block is compiled into a newly formed block, which is also added to the chain.
In a database, information is usually organized into tables, while in a blockchain, data is arranged into chunks (blocks), which are then linked together. When implemented in a decentralized fashion, this data structure creates an irreversible timeline. Filling a block is permanent and becomes part of the timeline. At the time of adding a block to the chain, each block is given an exact time stamp.
Blockchains function as a form of shared database that differs from traditional databases in the manner in which they store information; blockchains store data in blocks that are then linked together by means of cryptography.
New information is entered into a new block as it becomes available. The data is chained onto the previous block once the block has been filled with data, which results in the data being chained together in chronological order.
Various types of data may be stored on a blockchain, but the most common application to date has been as a transactional ledger.
In Bitcoin’s case, the blockchain is employed in a decentralized manner so that no single person or group has control, but rather, all users collectively hold these controls.
Decentralized blockchains are immutable, which means that any changes to the data entered cannot be reversed. In the case of Bitcoin, this means that all transactions are permanently recorded and are publicly accessible.
How Does a Blockchain Work?
A blockchain’s purpose is to enable the recording and distribution of digital information without editing. The blockchain provides the foundation for immutable ledgers, which are records of transactions that cannot be altered, deleted, or destroyed. Because of this, blockchains are also referred to as distributed ledger technologies (DLTs).
In 1991, the blockchain concept was proposed as a research project. The concept predated its first widespread application in 2009: Bitcoin. As a result, the use of blockchains has exploded, including the introduction of various cryptocurrencies, decentralized financial applications (DeFi), non-fungible tokens (NFTs), and many others.
An organization owns and operates a server farm of 10,000 computers that are used to maintain a database that contains the account information for all of its clients. In addition to owning the warehouse building where all of these computers are located under one roof, this company has full control over each of these computers and all of the information within them. However, this provides an additional point of failure for the company. For example, what happens if the power goes out at this location? Would the Internet connection be interrupted? Would the building burn to the ground? What if a rogue actor erases everything with a single keystroke? In any case, the data icorrupted or lost.
It is the function of a blockchain to enable the distribution of data stored in the database across a number of network nodes located in different geographical locations. Not only does this create redundancy, but it also maintains the integrity of the data – in the event that a record is altered at one instance of the database, the other nodes will not be altered and a bad actor will be prevented from altering the data. If a user alters Bitcoin’s record of transactions, all other nodes would be able to cross-reference each other and easily identify the user with incorrect information. Such a system enables a transparent and accurate record of transactions. Therefore, no single node within the network is able to alter the information stored therein.
The information and history (such as that of transactions relating to a cryptocurrency) are therefore irreversible. It is possible that a blockchain might store a record of transactions (for example, the information associated with cryptocurrencies). However, it is also possible that the blockchain might hold a variety of other information such as legal contracts, state identifications, or company inventories.
In order to validate a new entry or record into a block, the majority of the decentralized network’s computing power must approve it. Blockchains are secured by consensus mechanisms such as proof of work or proof of stake to prevent malicious actors from validating invalid transactions or double spending. By employing these mechanisms, consensus can be reached regardless of who controls the system.
In addition, because of the decentralized nature of Bitcoin’s blockchain, all transactions can be transparently viewed either by using a personal node or by using blockchain explorers that make live transactions available for anyone to see. Every node has a copy of the chain that is updated as new blocks are confirmed and added. Therefore, it is possible to track Bitcoin wherever it goes if you so desire.
For example, exchanges have been hacked in the past, in which those who held bitcoins lost everything. The hacker may be completely anonymous, however, the Bitcoins that they extracted are easily traceable. A move or expenditure of the Bitcoins stolen in some of these hacks would be known if they were moved or spent elsewhere.
The records contained in the Bitcoin blockchain (as well as most other blockchains) are encrypted. Records may only be decrypted by the owner (using a pair of public and private keys) in order to reveal their identity. This allows users of blockchains to remain anonymous while maintaining transparency.
Is Blockchain Secure?
Several ways are available for achieving decentralized security and trust through blockchain technology. To begin with, blockchain technology stores new blocks in a linear and chronological order. Thus, they are always added to the “end” of the blockchain. After a block has been added to the end of the blockchain, it is extremely difficult to reverse the changes made to the contents of the block unless a majority of the network has agreed to allow it. As a result, each block contains its own hash, along with the hash of the block preceding it, as well as the previously mentioned time stamp. Mathematical functions are used to generate hash codes, which are strings of digits and letters that represent digital information. In the event that the information is altered, the hash code will also be modified.
Let us say that there is a hacker who is also operating a node on a blockchain network, who wishes to alter a blockchain and steal cryptocurrency. They would no longer be able to align their own single copy with that of everyone else. When everyone else crosses-references their copies with each other, they will discover that one copy stands out, and the hacker’s version of the chain will be seen as invalid.
For such a hack to be successful, the hacker must simultaneously manipulate and control 51% or more of the copies of the blockchain so that their new copy becomes the majority and, therefore, the agreed-upon chain. In addition, such an attack would require an enormous amount of money and resources, as they should have to redo all the blocks, as they would have different timestamps and hashes.
Due to the size of many cryptocurrency networks and how rapidly they grow, the cost of implementing such a scheme is likely to be prohibitive. In addition to being extremely expensive, this would probably be completely pointless. In doing so, such drastic alterations to the blockchain would not remain unnoticed by other members of the network. As a result, all members of the network will switch to a new version of the chain that has not been compromised. As a result, the attacked version of the token would lose significant value, rendering the attack essentially pointless since the attacker retains control of a worthless asset. It would be the same if a malicious actor were to attack the new fork of Bitcoin. As a result, participating in the network is economically more advantageous than attacking it.
Bitcoin vs. Blockchain
The concept of blockchain technology was developed by Stuart Haber and William Stornetta, who wanted to develop a system that would prevent tampering with the timestamps of documents. The first real-world application of blockchain, however, did not occur until almost two decades later, following the launch of Bitcoin in January 2009.
Blockchain technology underpins the Bitcoin protocol. Satoshi Nakamoto, the pseudonymous creator of Bitcoin, wrote in a research paper introducing the digital currency that bitcoin is “a new electronic cash system that is fully peer-to-peer, without trusted third parties.”
It is important to understand, however, that Bitcoin uses blockchain only to create a ledger of payments that is transparent, but that in theory, blockchain can be used to record any number of data points. It is possible to utilize this data in a variety of ways, including transactions, votes in an election, product inventories, state identifications, deeds to homes, and many others.