Bitcoin is difficult for most people to understand. It’s based on trust, cryptography, finance, and computing. All of these are complex subjects. But, Bitcoin is an important phenomenon taking place and there’s good reason to be able to appreciate what’s happening. Let’s look at some of the features of this new currency that make it so special.
The Bitcoin network, called a blockchain, give Bitcoin it’s strength. Blockchain technology works so well that thousands of blockchains have been proposed and are in various stages of actualization. These are being created by banks, insurance companies, healthcare providers, and Fortune 500 companies to help secure data and provide trusted information to large networks. A blockchain network is described as a distributed network.
We are familiar with centralized networks where everything is sent in and out of the network through a centralized node. We also are familiar with decentralized networks where many different nodes are scattered across the network. A distributed network is a little different. But that difference is very important.
In a distributed network every node is connected to all of its neighbors. There are no great distances between nodes. A new node may be added to the network by attaching itself to an existing node. Before we talk about how block change works, let’s look at the problem it solves.
If you were in charge of some very sensitive, valuable information but you had to keep it on a computer how would you keep the data safe, preventing damage and free from unauthorized tampering, and secure, free from vandalism and theft? Remember, this is someone else’s data and they need access to it whenever they want. How do you keep the data safe and secure but still allow the rightful owners access?
First, to prevent loss there should be copies. How many? The more the merrier, actually. If everyone who had data in your care also had an exact copy of all of that data, wouldn’t that be great? If someone were to steal your computer, the data would be with all of the other players. In fact, if someone stole half of all the computers in the network, there would still be multiple copies of the records.
Ever hear the phrase “garbage in, garbage out”? This is another motto that applies to blockchain in spades. To ensure every new record is a good record, before adding it to the chain of all the blocks of old records, it is verified by comparing it to the existing records. Remember, of the 21,000,000 Bitcoin that can ever be created, 16,600,000 is already out there. They are being kept in Bitcoin wallets, and the amount and address of each wallet are the data in the blockchain. So before a new record is added which says X number of Bitcoin from address A is being transferred to the owner of address B, that new record is checked to see that there is, in fact, X Bitcoin and then the differences recorded after the transaction. Before a Bitcoin transaction is built into a new block and added to the chain, hundreds of checks of this type are verified. That’s why Bitcoin transactions are not instant. They usually take about 10 minutes. But, having made those thousands of checks, the new block of transactions can safely be added to the blockchain.
With this system, two total strangers can exchange Bitcoin in full confidence that there is real Bitcoin, it hasn’t been lost or stolen and is the property of one to give to the other. The transaction is anonymous, that is a person’s name is not attached to the address. There are also no fees required to make this transaction. The work of keeping the distributed ledger up to date and accurate is done by miners who are rewarded for their work by getting paid in Bitcoin. There is a payment process which keeps the function of mining random and allows anyone to join. The reward is randomly given to one of the miners. It is a large reward and there is enough Bitcoin in reserve to pay miners for the next 120 years. At that point, the system changes to a fee-based system. By having a system that gives all comers an equal opportunity to be a miner, it prevents certain interests from monopolizing the mining function.