Key to Bitcoin’s success is the underlying blockchain technology, an example of a distributed network. Blockchain is a brilliant solution to the problem of trust. Trust makes the world go ’round. Put simply, without trust online payments would never work. Sure, you could send virtual currency to someone over the internet but how would they know if it were real or not. How do they know if you haven’t sent the same virtual currency to someone else? In a traditional money/currency scheme, a central clearinghouse or ledger is kept to note all transactions. Those are examples of centralized networks where all nodes can be traced back to a central point. That’s the system in place today for the entire banking system throughout the world. The problems with that kind of system are many.
With a centralized banking system, secrecy is key. There are fees necessary for someone to do the accounting and it all takes time. With all of the safeguards that have been put in place, there is still fraud. I’ve been told it was as much as seven percent on the credit card network at one time. For example, a wire transfer takes an enormous amount of information, filled out on a form at the bank. Addresses, balances, and permissions have to be verified. Even so, wire transfers take hours and have enormous sending and receiving fees associated with them. Blockchain does away with all of that. Openness is key and transactions are completed in a matter of seconds, with no fees at all. There is a very small processing fee for any transaction.
The enigmatic inventor of blockchain, Satochi Nakamoto, created a brilliantly simple yet elegant solution to the problem. Transactions would be distributed throughout the network. A block would be created with each new set of transactions. Usually, blocks have about 1000 bytes (1K). The new block is chained to several existing blocks through a simple but elegant process. The new block is not considered bonafide until several existing blocks authenticate its existence. When it is authenticated, it is added to the chain. The chain grows ad infinitum. Multiple existing blocks authenticating new blocks is key to the issue of trust. Bitcoin has used blockchain since 2009. There have been many millions of transactions thus far. Blockchain works!