Introduction
The words ‘blockchain’ and ‘Bitcoin’ are used a lot, but you’d be forgiven for not understanding their relation if you’re someone who’s not invested in the world of cryptocurrency.
To begin with, you must first understand what blockchain is before trying to understand how it relates to Bitcoin.
Bitcoin’s blockchain can be thought of as simply an open ledger; any transactions that occur on Bitcoin’s network will be recorded onto the blockchain. Think of it as a computerised accountant ensuring that each and every transaction is publicly displayed in the interest of transparency.
The way blockchains function is by keeping records of financial transactions and ‘public addresses,’ which enables anybody to view the ledger. Don’t fret about the risk of your privacy being violated, however. No identifying information is used on the blockchain. This ensures that no matter how big or small your transaction is, it won’t be linked back to you.
In relation to Bitcoin, ‘blockchain’ refers to both the ledger where the data is stored and the technology (protocol) behind the ledger.
How to read a block
It is incredibly easy to access a blockchain such as this one. Once on one, feel free to click on any given block and there will be a list, which may seem overwhelming to begin with.
Some of this list may appear tricky to understand, whereas other parts of it may seem easy to comprehend. Below is a short list of some of the key aspects within a block and what they mean:
Hash: The targeted number to successfully add a block of data to the blockchain is given in hash format. It is not stored in a regular format. Instead, it is encrypted with a SHA-256 algorithm. As a result, the hash value is presented as a 256-bit number.
Hash Rate: Refers to the amount of mining power protecting proof-of-work for the blockchain. Different blockchains have different amounts of hash rate.
Previous block: The previous block refers to the last target number that was required in order to add the previous block of data to the blockchain. Therefore, the previous block value will be the 256-bit number that was used to add the last block that was secured on the blockchain.
Difficulty: This number is indicative of how difficult it will be to find a block in accordance with the current target (256-bit number). For instance, it is quite difficult to generate a random number which is exactly equal to or lower than the target value. The way the difficulty is determined is by dividing the maximum target by the current target. Difficulty readjusts every two weeks on the Bitcoin blockchain. Some different difficulty readjustment periods as part of their consensus mechanism.
Nonce: The nonce, in a Bitcoin block, refers to a 32-bit field. The value is adjusted by miners so that the hash of the block will be less than or equal to the current target. Any change in the block data (e.g. the nonce) will make the block hash completely different. Because it is thought to be infeasible to predict which combination of bits will produce the correct hash, many nonce values are tried. This forces the hash to re-compute for each value until a hash less than or equal to the target is discovered.
Block reward: The block reward is currently at 12.5 BTC, meaning if you correctly add a block to the blockchain, you would be rewarded with 12.5 Bitcoin. The block reward is cut in half every four years. When Bitcoin first appeared, if you added a block to the open ledger, you would have been rewarded with 50 Bitcoin. In 2014, it was reduced to 25. It now currently sits at 12.5, and is set to be halved again in 2020.
Decentralisation
Typically, Bitcoin miners will pool together and run software on the Bitcoin network from multiple nodes. This immediately demonstrates Bitcoin’s independence from state control, because there is no single entity controlling everything; it is distributed.
While it is all well and good understanding how Bitcoin functions as a decentralised movement, it does not fully explain the relationship with blockchain. Blockchain becomes an essential part of Bitcoin because of how public the records are. State controlled entities do not hold privilege over Bitcoin financial transactions – they can be freely viewed by the people.
It is quintessential of cryptocurrency to want to be decentralised, because this was one of the founding principles that led to its birth. At its very core, the notion is that all aspects of cryptocurrency unify together to create a system where relying on peers or middle-men disappears from the equation. It wants to bring power back to the people.
Furthermore, blockchain technology is rather difficult to hack. It was created with cryptographic hash functions that are designed to be one-way; meaning they are infeasible to invert. Cryptocurrency wallets are also used in conjunction with blockchain and utilise an account number and password (technically speaking, a public address and a private key).
Private keys are only known to their user and are beneficial because they craft a digital signature that enables the owner to move funds around on the blockchain. This typically suggests that if you were to have your cryptocurrency robbed, it is because the user didn’t follow steps that ensured their accounts were safe. Because it is demanding work to hack cryptographic hash functions, people who are looking to steal cryptocurrency will target people who have not maintained tight security on their accounts.
What does this all mean?
So, to summarise, blockchain technology’s relation to Bitcoin is more than one thing: it enables cryptocurrencies like Bitcoin to be decentralised, distributed, transparent and maintain consensus across its network.
All of this is made possible by the various nodes across the globe. People can freely inspect the ledger and check whether or not a transaction is valid. If someone attempted to change a record retroactively, it would change several blocks and begin corrupting data on the network and someone would notice; it won’t be hidden. Remember, transparency is pivotal.
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Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.