You’ve probably heard of Bitcoin, the popular cryptocurrency that has become a household name in just a few years. And while you may be aware of Bitcoin, are you aware of the underlying technology that supports it?
This technology is called the blockchain. Think of the blockchain as a digitally-operated ledger system. It records and tracks transactions across all connected computers (or nodes) in a public database.
Blockchain works by using cryptography to create immutable blocks of data. The primary information stored in the blockchain includes the history of transactions made by other users connected to the network—in other words, it stores and records Bitcoin transactions.
Learning about the blockchain can help you understand the revolutionary potential of Bitcoin’s financial system and cryptocurrency at large. And with its widespread adoption, knowing the inherent mechanisms behind this technology can give any modern-day investor an advantage in growing their investment.
Let’s look into the key elements of blockchain, its benefits and drawbacks in a broader perspective, and its potential use cases.
The Nature of Blockchain and its Connection to Bitcoin
Blockchain is a type of technology that underscores Bitcoin and cryptocurrency as a whole. It’s a distributed ledger that’s connected across multiple computer networks, also known as nodes. This ledger is vital in facilitating the exchange of cryptocurrency with utmost security.
The blockchain sets itself apart from traditional intermediaries in that it completely operates on a peer-to-peer (P2P) network. Nodes across multiple computer networks support the recording and validation of transactions, creating an immutable and transparent record of transactions.
The information produced in the blockchain (the blocks) is also unalterable. No one can manipulate or change the string of text attributed to a transaction in the ledger.
This ensures that information made visible is completely transparent, thanks in part to the lack of third parties having the ability to make any alterations. This gives both parties in a transaction peace of mind as it reduces the chances of anyone falsifying data without detection.
How Does the Blockchain Work in Bitcoin?
A blockchain works similarly to a spreadsheet in a cloud storage. However, the key difference is that it’s decentralised and distributed, meaning there’s no larger entity overseeing its systems.
Furthermore, instead of a user typing in text and symbols like in a Google Sheet, the blockchain uses a program-specific language called a script that defines and executes a set of actions.
This script sets the conditions for verifying individual transactions. Moreover, the nodes in the network validate these transactions by ensuring they meet the script’s criteria.
For instance, if a Bitcoin transfer has been initiated from one computer to another, this gets verified and recorded into the blockchain via a script, specifically the Bitcoin Script.
During the transaction process, a miner validates the transaction by solving a cryptographic, Proof of Work (PoW) puzzle to find a specific value in the algorithm to produce a valid hash.
The validation processing speed depends on the difficulty of the puzzle, which adjusts to maintain the pre-set 10-minute block creation time. Miners typically get rewarded with newly minted Bitcoin for their effort and resources.
Once the transaction is verified, the data becomes a block—a container for transaction data including its value and the timestamp. It is then added to the ledger.
Each block is connected to a previous one in the blockchain through a hash, a unique cryptographic string that depicts the block’s data.
The hash is a security measure that makes the data immutable. Tampering with a block would invalidate the block’s data because the hash would not match the data from the rest of the blockchain. The tampered block would then be rejected because of the noticeable hash mismatch from all connected nodes in the network.
Once a hash has been recorded and validated, it gets added and becomes a part of the blockchain. This process helps keep the blockchain secure, transparent, and traceable without the need for a larger or external entity controlling it.
Connecting Bitcoin to the Blockchain
Bitcoin uses the blockchain as a way to make transactions without a third-party entity. No Bitcoin can ever be mined, owned, tracked, or traded without the underlying blockchain running the operations.
The Benefits of Blockchain
There are several advantages for financial investors to dive into the world of Bitcoin—which will naturally entail familiarisation with blockchain technology.
Here are some of the reasons why learning about it is so beneficial:
- It helps you skirt over central entities: There’s no central authority that governs your money, unlike traditional currency and banks. It’s a fully operational P2P system that’s supported by a network of computers.
- It has quick processing speeds: Unlike banks, you don’t need to wait until they open in the day. You don’t need to wait for long cross-border transactions to be fulfilled either. Transactions are quickly processed, making it a highly efficient way to transfer assets.
- It’s secure: Blockchain’s cryptography is the first of its kind in a practical setting. The immutable and tamper-proof ledger makes it highly resistant to fraudulent activities made by unscrupulous individuals.
- It’s transparent: You can track and trace past transactions, as well as the participating networks, in the blockchain network. This makes it easier for people to trust who they’re transacting with and verify and audit transactions.
- It removes third-party fees: Typically, intermediaries may request a cut of the money to conduct a transaction. In the case of Bitcoin and its underlying blockchain, the cost is reduced and typically not as high as the ones requested by other intermediaries like banks, especially for cross-border transactions.
Blockchain is a transformative way of conducting financial transactions thanks to its decentralisation, security, speed, transparency, and cost-effectiveness. And this has yet to include the price increase of this cryptocurrency over the past few years.
Couple that with the ease of access for everyday people to invest in Bitcoin through cryptocurrency exchanges like bitcoin.com.au, and you’ve got yourself a technology that’s bound to stick around for the long haul—so long as it won’t encounter any fatal flaws.
The Drawbacks of Bitcoin Blockchain
While blockchain has its perks, it’s not without its flaws. Currently, these are the biggest controversies and limitations surrounding Bitcoin’s blockchain.
- High energy consumption: Bitcoin’s PoW mechanism requires a lot of electrical energy to process. In fact, worldwide BTC transactions last year surpassed the entirety of Finland’s electrical consumption in the same time span.
- Transaction costs: Transaction costs may be high if there’s high network congestion. A wrongly-timed transaction can make fiat currency a more economical option for smaller payments.
- Irreversibility: If a user has sent Bitcoin to another wallet due to fraud or scam, it would be extremely hard to retrieve that money—if not downright impossible.
- Low scalability: Bitcoin’s blockchain is relatively slow, only capable of handling 7 transactions a second. This increases the risk of experiencing transaction delays.
Furthermore, Bitcoin’s blockchain is also limited in terms of functionality beyond the financial and digital realm. But that’s where other cryptocurrencies like Ethereum and Solana fill in—thanks to their Proof of Stake mechanisms.
Is Blockchain the Future?
Bitcoin’s blockchain technology spearheaded a new financial age where digital currency is accepted with actual monetary value. But is it going to persist?
Truthfully, while Bitcoin and its underlying blockchain have their strengths, a lot of other cryptocurrencies and their pertinent blockchain offer a slew of improved features with their blockchain’s mechanisms.
These features go beyond the financial realm and into more practical territory. This includes:
- Healthcare: Patient data can be stored in the blockchain, optimising security, accuracy, and privacy.
- Supply chain management: The blockchain can track and record the progress of inventory in every step of the supply chain.
- Voting systems: Blockchain systems and their inherent tamper-proof and transparent nature make it a good system to collect votes.
- Smart contracts: These contracts can automatically execute when predefined conditions are met without needing a third party to oversee them.
- IP protection: Inventors, artists, and businesses can mark their ownership in the ledger, protecting their works in this particular space.
With blockchain technology still being a relatively novel concept, there are bound to be more use cases for it across industries as it develops. It’s only a matter of time for it to reach beyond the space it occupies and into more mainstream mediums.
We hope this article helped you understand the technology underscoring Bitcoin!