Bitcoin for beginners 2: Blockchain Simplified
Lots of people in the world over don’t have the foggiest idea of what blockchain technology is. So today’s article answers the question, how does Bitcoin work? To understand this, we will need to breakdown how the decentralized block chain technology works, the technology on which the Bitcoin network is based.
Now let’s dive into it
We break it down into simple steps
- Let’s assume we have a cryptocurrency. Let’s call it e-currency that I hold 2 of i.e I have 2 e-currencies
- What stops me from sending this same 2 e-currencies to say three of my buddies and still retain the same balance of 2 e-currencies? (we do that with other forms of data every time don’t we? We for example send a copy of a document to say a hundred people in a group and we still retain the original copy)
- The way this prevented is via a ledger (a book of records), in this case an electronic one on the internet. This ledger keeps a record of all the transactions on this e-currency network. This ledger is known as the block chain
- So, why is it called a block chain? It is called so because of how it works. So let’s assume on the ledger with have the following balance
Ade – 7.5
Dele – 0.5
What stops me (and I am Lolade) from doing this to the ledger. Increase my own balance and reduce someone else’s
Ade – 7.5
Dele – 0.5
Emeka- 0.1 (Emeka got me angry last week)
The reason why this can’t be done on the ledger is that it is programmed in such a way that no one can change any information on the ledger. The information on the ledger can only be UPDATED!
- So, if we have the initial e-currency balance on the blockchain thus
Ade – 7.5
Dele – 0.5
Emeka – 1
Ade – 8.5
Dele – 0.5
If anyone where to make a transaction on the e-currency blockchain, the new balances resulting from the transaction initiated will have to be recorded and show on the next block which will be the updated block. As seen above I (Lolade sent 1 e-currency to Ade. Ade’s balance becomes 8.5 e-currencies while mine is reduced to 1
- Now these questions would arise:
- Who gets to make entries into the blockchain?
- When do they make entries into the blockchain?
- How is it ascertained that those making entries into the blockchain are making accurate entries?
We will answer those question below. Read on
Part 2: The Security Model of the Blockchain
So all the above questions at the end of part 1 can be summed up in the word SECURITY. What is the security model of the blockchain?
- The blockchain runs via a network of computers through the internet. The basis of the network is for different people, scattered across the world keep copies of the blockchain (a record of all the various transaction on the ecurrency money network in our example) on their various computers and agree on the state of that blockchain at any given time. They are connected to one another via the internet. Anyone with the necessary hardware can join this network of computers without having to obtain permission of any sort to do so.
- The purpose of the network is for all the participants running nodes (copies of the blockchain on their various computers) to agree on the state of the blockchain at any given time. For example, if at a given time, the copy of the network appears thus
Brad (a miner in the USA) Kim (miner in china)
Lolade- 2 Lolade – 480
Ade – 7.5 Ade – 7.5
Dele – 0.5 Dele – 0.5
Emeka- 1 Emeka- 1
Two different miners broadcasting two different balances of my ecurrency on the network isn’t right and will only ruin the integrity of the network.
The states at which all participants that have a copy of the blockchain agree on it at any given point in time is called CONSENSUS. It is consensus that ensures the security of the blockchain network.
- The mechanism used to achieve consensus ( to know who owns what) is called proof of work consensus algorithm on the Bitcoin network and also on our hypothetical e-currency network. It helps the network PICK who makes an UPDATE to the network and WHEN.
- The goal is to not have Brad and Kim broad casting two conflicting update of our blockchain at the same time. The way the network works is, one person makes the update of the current state of balances on our e-currency network. The other miners look at it (verify it). When everyone or almost every one of them agrees on this new copy of the balances on the ledger, it is then incorporated (added) unto the chain, hence the name blockchain.
- The miners use specialized computers that solve complex mathematical problems. The more miners are on the network, the more difficult it is to solve the problem. The miner that gets to solve the problem gets to update the ledger and this happens every few minutes
- What happens when a miner solves the problem and updates the ledger? Two things happen
- The miner gets a block reward in form of newly created Bitcoins on the blockchain (on the Bitcoin network, in our hypothetical case,the e-currencies). As a reward of proving his work (hence the name Proof of Work)
- The miner gets to publish the update i.e the new block with the update he/she/they just did containing all the transactions that just happened in the last few minutes.
So, in this way, the miners on the network keep perfect record of:
- Each transaction made
- The time it was published
- And the total number of coins now available on the network and who owns what
- This above means that inflation, the amount of new money created is
- Honest and
- Account on the blockchain are not written against people’s names. They are linked to alphanumeric addresses that people own. Each one is unique
Part 3: Your account on the Blockchain through CRYPTOGRAPHY
In our example above i.e the e-currency example, my name and those of the other users of the blockchain is shown. In actual fact, nobody’s name is displayed on the blockchain. Rather, each person’s account is represented and tracked by an ALPHA-NUMERIC string (a string of numbers and alphabets) e.g B1xgxyrtbgb5tiLadnyy7IcM.
Now we need to describe cryptography. Cryptography is a form of mathematics that provides the basis for how different accounts interact with each other on the blockchain. So, if someone wishes to send money to another person on the blockchain. The transaction will be from one alpha-numeric address to another. The initiating alpha-numeric address (from the sender) would be a private key, the receiving alpha-numeric address will be a public address. The next block which is a publication of the update to the ledger will reflect the transaction. Now the next question would be, how is the transaction actually made? Well, whenever you initiate a transaction, the private key (which is embedded in your wallet) broadcasts a message through the internet to the network (Bitcoin/our hypothetical e-currency etc) stating the amount of Bitcoin/e-currency etc you are sending and to which public address. The miners see this and update your balance and that of the recipient on the ledger and then publish it on the next block.
This in a nutshell is how the DECENTRALIZED BLOCKCHAIN TECHNOLOGY works. The tech on which Bitcoin and other decentralized cryptocurrencies/ tokens are based