Decrypting Bitcoin and Blockchains – Part 1

Decrypting Bitcoin and Blockchains – Part 1

Bitcoin, cryptocurrency, and blockchain. These three words have been all over the news recently. Despite the explosion of coverage there’s still a lot of confusion around what they actually are. With billions of dollars being poured into these technologies and all the talk of how revolutionary bitcoin or the blockchain is, we thought it’d be a good idea to dig in and try to get a better understanding. By no means will you be an expert after reading this, but hopefully it will be enough to make you dangerous at happy hours and holiday parties. Part 1, which you’re reading, will give a general overview of bitcoin and explain what a blockchain is, and Part 2 will go into more depth on cryptocurrencies and the other applications of blockchain technology.

From its very inception bitcoin has been shrouded in mystery. Created in 2009 by an individual or group known only as Satoshi Nakamoto, to this day it’s still unknown who the real creator is. It’s kind of fitting in a sense – an anonymous person or group creating an anonymous, decentralized payment system. Bitcoin is the original cryptocurrency and the underlying technology that makes it so special is called the blockchain. What makes bitcoin so compelling isn’t just that it’s an anonymous way to send and receive payment, it’s the also newly created technology that makes that system possible. Bitcoin’s software is open-source and freely available for anyone to view and copy. This has allowed developers to play the code and create new cryptocurrencies and applications for blockchain technology, and has spurred its explosion into our collective consciousness. So, neither bitcoin, cryptocurrencies, nor blockchains existed until Nakamoto unveiled his/her/their creation of all three.

Linking Up With Blockchain

Put in the simplest of terms, a blockchain is computer software that’s really, really good at keeping track of things. More specifically, it’s a record of transactions that’s distributed to every computer on its network, making that record exist in thousands or millions of places simultaneously. That means that there is no singular point of vulnerability for a hacker to target. Instead of hacking into a single computer you’d have to hack into those thousands or millions of computers all at once. The network itself operates on a peer-to-peer basis, so rather than some central authority being in control it’s governed by a consensus from its participants who are all connected as individual nodes. This decentralized control makes any unilateral action completely infeasible because the entire network must be overridden. However, doing so would compromise the network and any value in participating would be destroyed. So, there’s a kind of built-in deterrent that, coupled with the effort and expense of overriding the network, makes even attempting a pointless endeavor. Finally, though it’s public and accessible to anyone with an internet connection, the information stored on a blockchain is encrypted. A “public key” (a series of random numbers) is a user’s address on the blockchain and how he or she can be found to receive a payment. Digital assets (e.g. bitcoin) sent across the network get recorded as belonging to that user’s key. The “private key” is like a password that gives its owner access to their assets and should be known only by that owner (like your bank account number). When transactions are made, the sender addresses the transferred assets to the recipient’s public key and digitally “signs” the message with information taken from the transaction where they received the assets they’re now sending. Basically, it’s saying “I’m the true owner of these assets. Here’s proof of when I got them, from whom, and the amount.” The digital signature, called a hash or hash signature, and the public key are checked against one another by other users on the network in order to verify the validity of the transaction and the new block it belongs to. The hash confirms that the transaction’s sender owns the assets by tracing those assets’ transaction history all the way back to when they were created.

Building Blocks

Ultimately, a blockchain is exactly what it sounds like, a chain of blocks. Each block is comprised of a set of transactions that have been validated and cryptographically linked, via the previous block’s hash signature, back to each block in the chain.  New blocks are created by network participants doing work validating transactions by checking to see if the sender actually has access to the assets they claim to own. This is what ‘bitcoin mining’ is. Miners, who are just network participants, earn bitcoin for successfully validating transactions, and it’s also the only way new bitcoins can be created. Each new transaction gets broadcast to the network and the computers connected to it run complex algorithms to verify that the transactions are consistent with the previous blocks in the chain. Once determined to be valid, the new block is added to chain and every copy of the blockchain on the network gets updated with the new data. In the case of bitcoin, users are incentivized to validate transactions by earning bitcoin for their work, but the incentive structure can be different for different blockchains being used for different applications. But all that is for next time when we’ll talk about applications for blockchain technology including and beyond cryptocurrencies.

To summarize:

  • Bitcoin was the first cryptocurrency, but there are already thousands of others with their own characteristics.
  • Cryptocurrencies run on blockchain technology, which is a digital ledger that is distributed in its entirety to every participant in its network. The information is public and accessible to everyone, but at the same time is encrypted, immutable, and incorruptible.
  • Blocks are created by participants validating new transactions, using their computers to solve complex math problems that verify the transaction’s information is consistent with the rest of the chain, thus allowing them to become part of the database.
  • Validated transactions are grouped into blocks. Each block is linked via cryptographic hashes to the previous block and each prior block going all the way back to the beginning. Everything stored on the chain can be traced back to its origination through the these linked blocks.