This is how the technology behind Bitcoin works

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There's so much noise about Bitcoin right now on the web.

You either hear a lot of people making money or...losing money.

But the rapid growth in the industry can't be denied. The market capitalization, only a billion dollars in 2013, rose to 272 billion dollars this year. 

Total market capitalisation of cryptoassets

Apart from Bitcoin, which most people have probably heard of, the underlying technology, Blockchain, is still relatively unknown. If you are still unclear as to why you should invest in Bitcoin are, this post will be of great help to you.

In this post, we explain the Bitcoin blockchain and give you a clearer picture of how this technology works. There are other digital assets that make use of the blockchain technology too. However, the blockchain behind some of those other assets function differently from the Bitcoin blockchain. This post on investing in cryptoassets will help you understand the various classes of cryptoassets in the market and how to start investing in each. 

But why should you even be bothered with understanding what Blockchain is anyway?

Benefits of Blockchain

4 benefits of the blockchain technology

As you can see, it's simply not just about payments, this disruptive technology could turn out to be important to key aspects of our lives.

From contractual relationships to electoral, legal, accounting systems and every other system that requires security, trust and transparency of data.

What is Blockchain?

Now let's see what the technology itself looks like.

Think of the blockchain technology as the construction of a house. Starting at the foundation of the house, you must add concrete blocks onto the previous block till you get to the top, right?

Each subsequent concrete block is “connected” to the previous block and references part of the previous block.

This is how it's obtainable with Blockchain also. New blocks (don't worry, we'll explain what a block means in Blockchain later) reference code from prior blocks, all the way to the “genesis block”. 

It's quite similar to how a child inherits DNA from the parents.

The genesis block is the very first block on a blockchain technology. Or, using the house analogy, it's the first block at the base of the whole house.  


Let's dive deeper into studying each "block" and how they are chained together.

Breaking down the word “Blockchain."

The first part of the word reads “Block.” 

Think of each block on the network as a housing for information, or transactions with written code within. Once enough transactions have occurred, a block is created and must be added to the Blockchain. 

So, we can say a block is a record of new transactions or data. Mary sends money to John, that’s a transaction. John buys some shoes from Lisa, that's also a transaction. These transactions make up a block.

An example of a ledger in Bitcoin blockchain

Transactions in the same block are considered to have happened at the same time but transactions not yet in a block are considered unconfirmed.

You know what a "Block" is now. What about "Chain"?

The process involved with connecting blocks is done through computational power. 

For each block to be "chained" to the Blockchain, a complex mathematical problem must be solved in order to validate transactions and create new blocks.

Transaction processing in a Bitcoin blockchain

Source: Michele D'Aliessi on Medium

The only way to solve these mathematical problems/puzzles is to use a powerful computer or mining rig.

The people who connect these blocks, similar to bricklayers, are called miners. They earn a new coin as a reward for solving the problem before other miners on the network. That process of connecting blocks is called Proof of Work. This model is currently used by Bitcoin.

However, other cryptocurrency platforms have developed new models to achieve consensus, the most popular being Proof of Stake (PoS). 

There's been a division as to which is best for the Blockchain network. 

Is it Proof of Stake or Proof of Work? 

But here's what you need to know.

Proof of Work Vs Proof of Stake

Blockchain Proof of Work compared to Proof of Stake

Data Immutability on Blockchain

Going back to our analogy of a house construction again.

Another inherent characteristics of a building is decentralization and trust.

How? You would probably ask.

A building, say your house, is reliant on the support of each concrete block in that construction. Removal of one concrete block could have an impact on the whole house. That means each concrete block is important to the design of your house. It's a decentralised system that requires each concrete block to bear some of the weight of the entire structure. 

Same goes for blockchain, the validation of a transaction requires a communal consensus. The people on the network get to determine the integrity of the information in the blockchain.

So, trying to alter a block on a blockchain network would require the agreement of at least 51% of the people on that network as well as changing all succeeding blocks referencing the block that has been altered.

Do you now understand why people say data in a blockchain is immutable? It's not that it can't be changed, it will only require massive collusion in the network.

Watch these videos to also get a better picture about how other cryptoassets process transactions.