Bitcoin Blockchain – What does the blockchain do?

Bitcoin Blockchain

The bitcoin blockchain

The Bitcoin Blockchain is a single digital file that contains a list of all transactions that have occurred using bitcoins.  This would include any transfer of bitcoins as well as the addition of newly minted bitcoins.

The purpose of the blockchain is to keep an accurate record of all the bitcoins in use, and the amount of bitcoins connected with every address (account) on the bitcoin network.  This allows the bitcoin network, and all bitcoin users to follow the transaction history of all bitcoins.  You can see this by looking at the bitcoin blockchain explorer.  More importantly, by keeping such a record, it is possible to make sure that no one can spend the same coins twice.  This is known as double spending.  Preventing it is critical to the stability of any currency, digital or not.

Double spending is much like writing two cheques for $100 when your bank account only has $100 in it.  When someone does this, eventually the bank notices and one cheque bounces and someone doesn’t get paid.  Since bitcoin doesn’t have a central controlling authority, some way is required to prevent the chance of double spending.  The blockchain does this.

The instant a transaction is made, it is added to the blockchain, and distributed to all users of bitcoin.  This means that everyone knows that the sending account now has fewer bitcoins in it (and its current total), and that the receiving address now has more coins in it (and its current total).  If the sender attempts to send more than they have, the entire network will know and the transaction will be rejected.

Bitcoin Blockchain Security

Being the smart person you are, you are probably wondering why some nasty person doesn’t just hack the blockchain and re-write transactions so they can keep spending their bitcoins over and over.  While this is technically possible (it is called a 51% attack), in real life, it is impossible.

Every transaction, and all data in the blockchain is encrypted using an algorithm called SHA-256.  This is a very complex way of encrypting data.  It has two parts: the encrypted data, and a key to unlock it.  With SHA-256, any change to the data (even just adding a zero, or a period), will create a completely different encryption, requiring a completely different key to unlock it.  If you know the key, it is very easy to unlock, without it, it is a pure guessing game.  The bitcoin network uses very large keys that need hundreds of billions (trillions) of guesses in order to find the key.  To crack the key would require millions of dollars worth of computer equipment working around the clock.  And, the crack would have to happen before any new data was added to the blockchain.  This is because once new data is added to the chain, any previous data is considered accepted by the entire network and is locked in place permanently.

What is bitcoin? Basic bitcoin and bitcoin wallet details

Bitcion Currency Logo

Bitcion Currency Logo

What is Bitcoin?

So exactly what is Bitcoin? Basically, it is the first fully digital currency.  It was invented and released in January of 2009 by a Japanese man, Satoshi Nakamoto, who until very recently was anonymous.  While interest initially was limited to a rather tech-saavy croud, bitcoin has had a fairly consistent gain in general popularity and use since roughly 2010.

Bitcoin has become a very widely accepted and used currency.  People and businesses all over the world make daily use of this currency in their lives.  It is used for business transaction, personal savings, and financial protection (during the financial collapse in Greece, many Greek citizens bought bitcoins to avoid huge personal losses as their regular currency crashed).

Bitcoin Basics

Only 21 million bitcoins will ever be created, which makes them a fairly scarce resource.  However, much like physical currency, bitcoins are divisible into smaller amounts (you can send partial bitcoins) for small transactions.

There are no physical coins used to represent bitcoins.  All information about bitcoin (how many there are, who has some, the transactions made with them) is kept in a digital file available to everyone who uses bitcoin.  This means that bitcoin exists only in the form of electronic data.

This digital file is called the BlockChain.  It contains a record of all transactions made using bitcoins.  When bitcoins are sent from one user to another, a new record of that transaction is added to the blockchain.  When new bitcoins are minted (added to the network), they are added into the blockchain also.  As you may have guessed, the size of the blockchain grows with every transaction made.

Bitcoins are not just simply floating around.  They are all connected to a bitcoin address (think of this as a bank account #).  Any person can have a bitcoin address, and can use this address to send and receive bitcoins just like an ordinary bank account.  However, unlike regular money, bitcoin users are responsible for the creation and management of their own bitcoin accounts and addresses; there is no centrally controlling or managing authority.  This is part of the reason why bitcoins are considered to be a decentralized currency.

Creation and management of bitcoin addresses is very simple.  It is done with a piece of software called a bitcoin client.  This software not only allows you to create addresses for sending and receiving coins, but will also let you send and receive bitcoins and take care of adding the information for each of your transactions to the block chain.  There are several very good quality bitcoin clients available for many different computer systems (Windows, Mac, Linux).  The easiest way to get the most up-to-date official clients is to visit the official bitcoin website and download the client that suits your needs.

So in summary, what is a bitcoin?  It is a fully digital currency.  Each bitcoin user has their own bitcoin addresses that they manage and control on their own.  Bitcoins are used for pretty much any kind of transaction from buying a pizza to investing in real-estate.  Finally, bitcoins are used and accepted anywhere in the world, and no one person or business controls them.