Have you ever wondered what powers the world’s most famous cryptocurrency? The Bitcoin blockchain is the ultimate record keeper of all Bitcoin transactions. It stands as a beacon of security in the fast-evolving crypto world. We prepared this detailed guide to help you understand what blockchain technology is in the crypto world.
The blockchain refers to a decentralized public ledger that records the history of every crypto transaction. Bitcoins and blockchains are very interrelated, and the blockchain operates by organizing transactions’ data into interconnected blocks to establish an indelible and unalterable chain of information.
Each block contains a combination of Bitcoin transactions that occurred within a specific timeframe. These blocks are progressively stacked upon one another, with every new block reliant on its predecessor. Out of the progressive stacking, a continuous sequence of blocks emerges, forming what’s commonly known as the blockchain.
With the addition of a new block to the blockchain, the previous blocks are effectively rendered immutable. This mechanism enhances the security of each block over time and exemplifies the transformative impact of Bitcoin technology on banking and financial transactions.
To explore the blockchain’s contents, Bitcoin users can employ the use of various Bitcoin blockchain explorers. These services allow anyone to obtain a copy of the blockchain and examine it, enabling the tracking of Bitcoins from one transaction to another. It is important to note that while the blockchain records every transaction ever conducted, these transactions are not intrinsically linked to real-world identities. As a result, Bitcoin is commonly regarded as pseudonymous, providing a degree of Bitcoin anonymity to its users.
Transactions on various blockchains follow individualized, distinct processes. Suppose you’re transacting on the Bitcoin blockchain, with a cryptocurrency wallet serving as the interface to interact with the blockchain, how will the process look like? Well, the action sets off a series of activities in motion.
In the case of Bitcoin, your transaction is first sent to a mempool, where it joins a queue of pending transactions awaiting validation. Once a block is formed and filled with transactions, it is sealed and safeguarded via encryption through a robust encryption algorithm. At this point, the Bitcoin mining process commences.
Numerous participants work simultaneously across the whole Bitcoin network to solve a complex hash puzzle. Each miner generates a unique random hash, except for the nonce. Initially, every miner begins with a nonce set to zero, attached to their randomly-generated hash. If the resulting number is not equal to or less than the randomly-generated hash, the nonce value is incremented by one, generating a new block hash. This process continues until a miner successfully produces a valid hash, claiming the associated reward.
Once sealed, the corresponding block is considered complete. However, it is important to note that the block is not fully confirmed until it has undergone validation by an additional five blocks.
The confirmation process typically takes around an hour to complete within the network. This duration is derived from the average block time per Bitcoin transaction of just under 10 minutes.
In multichain cryptocurrencies, the transaction speed is even higher.
Please note that some blockchains do not adhere to this exact process. The Ethereum network, for example, employs a different approach. It randomly selects a validator from all users who have staked Ether to validate blocks, which are subsequently confirmed by the network. This method proves to be considerably quicker and consumes less energy compared to the process employed by Bitcoin.
Unlike traditional financial systems that rely on intermediaries, the Bitcoin blockchain operates on a peer-to-peer basis, enabling direct transactions between participants. But what are some of the most prominent specifics of the Bitcoin blockchain technology?
The Bitcoin block size limit plays a crucial role in determining the number of transactions that can be confirmed on the network within an approximate time of 10 minutes. According to Bitcoin history, when Satoshi Nakamoto introduced Bitcoin, he set the block size limit to 1 megabyte. This limit allowed for an average of three to seven transactions per second, depending on their individual sizes.
With the SegWit (Segregated Witness) upgrade in 2017, the Bitcoin blockchain size was updated to a block weight of 4 million weight units. This update brought a significant change in how data within blocks is evaluated, considering that certain data carries more weight than others. Besides, it resulted in an effective increase in the block size limit. Bitcoin blocks can now theoretically reach a maximum size of 4 megabytes, while a more realistic maximum size is 2 megabytes. The specific size varies depending on the types of transactions included within the blocks.
Different cryptocurrencies exhibit varying average block times. For instance, Bitcoin takes around 10 minutes to generate a new block, while Ethereum takes around 14 seconds. The actual duration for block generation fluctuates and relies on the difficulty of the hash, which refers to the hexadecimal number produced by the hashing algorithm.
Block times are never constant and can experience significant variations from block to block. This variability comes about as a result of several factors influencing crypto mining, including an element of luck. It becomes more meaningful to asses the average block times rather than focusing solely on individual block durations.
The block size limit plays a crucial role in determining the maximum number of transactions that can be accommodated within a single Bitcoin block. Currently, this limit is set at 1 megabyte. However, the actual capacity of a block depends on the average size of the transactions being included.
On average, a typical Bitcoin transaction occupies approximately 225 bytes of data. By estimation, a block theoretically has the potential to contain around 4,444 transactions (1,000,000 bytes / 225 bytes per transaction = 4,444 transactions). This figure serves as an estimate since the exact number of transactions within a block can vary due to factors like transaction size and complexity.
In practice, the actual number of transactions in a block fluctuates in response to the demand for transaction processing on the Bitcoin network at any given time. During periods of high demand, there might be a backlog of unconfirmed transactions awaiting processing. This situation can lead to increased Bitcoin fees and longer confirmation times. On the other hand, during periods of low demand, the number of transactions per block may decrease, leading to lower fees and quicker confirmations.
The Bitcoin hash rate refers to the computational strength and processing capability contributed to the network through mining activities. It serves as a representation of words, messages, or data of varying sizes.
Different cryptographic projects employ diverse hashing algorithms to generate unique hash codes. An analogy can be drawn by considering these algorithms as distinct systems functioning the same as random word generators, each producing its own set of random words.
The difficulty of meeting the hash requirements aligns with the demand placed on it. A valid hash must fall below a specific target value determined automatically and adjusted periodically according to Bitcoin’s protocol. The lower the target value, the more iterations of the hash function a miner must undergo to achieve an acceptable outcome. This higher difficulty implies that miners, on average, need to attempt more nonces per block.
Since each hash is generated randomly, it may require millions of attempts or hashes before meeting the target hash requirement and rewarding the successful miner with newly minted Bitcoins. Only then can the transactions be incorporated into a fresh block within the Bitcoin blockchain.
Through blockchain technology, the Bitcoin network is kept safe and transparent by the following attributes:
The Bitcoin consensus mechanism serves as a set of self-regulating software protocols within the code of a blockchain. It plays a vital role in achieving network-wide agreement on a digital ledger’s state. This synchronization is accomplished by maintaining a unified dataset, representing the version of the transaction history of the blockchain that’s mutually agreed upon. Instead of relying on individual nodes within the network to independently store a complete copy of the database, this approach ensures a single authoritative source.
When a pending transaction is introduced, nodes within the network input the relevant data and subsequently approve or disapprove the transaction after cross-referencing it with their records. For instance, if a user attempts to process a transaction using already accounted-for and spent coins, the request would be swiftly rejected based on the immutable ledger. Majority disapproval reinforces the denial, and users who deviate from the consensus often face network bans.
If a node wishes to contest a particular record, there must be a network-wide recall initiated.
Approval from over two-thirds of their peer nodes is necessary for the transaction to be confirmed, distributed, and permanently inscribed into the Bitcoin blockchain. This stringent process ensures the integrity and consensus-driven nature of the blockchain network.
The blockchain operates as an immutable database where data within the blockchain cannot be altered. The hash value bolsters the immutability concept by serving as a unique identifier for each block, enhancing Bitcoin safety on the network. It is generated based on the content of the block, resulting in a distinct value for each block. Consequently, this hash value is solely used to identify the corresponding block.
This unique feature allows blocks to establish references or connections to preceding blocks. For instance, the fourth block can reference the third block, which in turn references the second block, and so on. These references are facilitated through the utilization of hash values, and the immutability of the blockchain contributes to bolstering trust and enhancing the current auditing systems. It simplifies and potentially eliminates the need for extensive processes, thereby reducing the time and costs associated with audits.
Smart contracts in the Bitcoin blockchain can be defined as digital agreements that automatically run on the blockchain network based on predefined criteria. An example of a smart contract can be the automatic sending of Bitcoins from one user to another within a specified time delay. Smart contracts tend to be complicated, with many conditional criteria or can be just simple, like asking for a digital signature to allow you to utilize your funds.
Using its powerful scripting language (Script), the Bitcoin network runs a wide range of smart contracts. Users are allowed by Script to define criteria on how their Bitcoin shall be spent and specific amounts of Bitcoin are locked to these scripts during the authorizing Bitcoin transactions. To spend the Bitcoins locked to these scripts, users must first meet the predefined conditions.
Cryptography plays a vital role in safeguarding data against unauthorized access, especially within the blockchain technology space. The primary objective of cryptography in the blockchain network is to ensure the security and integrity of participants and transactions and guard against issues like double-spending. By employing cryptographic techniques, various transactions within the blockchain network are secured. This ensures that only the intended individuals can access, read, and process the transaction data, providing a robust layer of confidentiality and data integrity.
The Bitcoin blockchain involves the decentralization of data across multiple network nodes, encompassing computers or devices running blockchain software located at different positions. The decentralized approach not only creates redundancy but also ensures the integrity of the data. For instance, if an attempt is made to modify a record within one instance of the database, the presence of other nodes prevents such alteration from occurring.
As a result, no individual node within the network possesses the authority to manipulate the information it holds.
This data distribution, coupled with the presence of encrypted proof-of-work, establishes the irreversible nature of the information and its history. The permanence is exemplified in scenarios involving transactions within a cryptocurrency, where the blockchain serves as a record.
The blockchain serves as a platform for Bitcoin users to carry out transactions through a secure and trustworthy network. However, there are differences in the Bitcoin blockchain technology compared to other blockchains. We explore these differences hereunder.
The Bitcoin blockchain is the oldest crypto blockchain. As of the time of writing this guide (May 12th, 2023), the Bitcoin blockchain length stands at 479.68 GB, an 18.32% change from 405.42 GB a year ago.
Compared to other decentralized blockchains, like Ethereum which came into existence in 2015, the Bitcoin blockchain has stood the test of time, emerging as the best blockchain overall. Most recent entrants like Cardano and Polkadot, launched in September 2017 and May 2020 respectively, are still evolving and are yet to match Bitcoin’s blockchain technology.
Hard forking refers to the splitting of a blockchain to form a new version of the original blockchain. The Bitcoin blockchain has gone through more than 100 hard forks since its original release, with Bitcoin Cash, Bitcoin Gold, and Bitcoin Diamond being some of the most notable hard forks. Unfortunately, 28 of these forks were shut down in a short while due to various reasons.
Other blockchains, like Ethereum, have also forked in the recent past and come up with newer versions of themselves, like Ethereum Classic and Ethereum 2.0. While the original version of the Bitcoin blockchain is stable, developers are continuously working on improving its security and stability since altcoins rely on it for commercial cryptocurrency exchange activities.
The hash rate is tasked with measuring the computational power of Bitcoin. After the Chinese crackdown on crypto mining in 2021, Bitcoin’s hash rate fell to around 85 EH/s (exahashes per second) on a seven-day average in July 2021. With the low hash rate, Bitcoin was deemed insecure and vulnerable to attacks. The computational power of Bitcoin has, however, significantly improved to as high as 182 EH/s in late December 2021 since most of the Chinese miners relocated to countries like Kazakhstan, Canada, and the US, with some miners expanding their mining capacities.
Compared to other crypto blockchains, different consensus mechanisms are employed by various blockchains. Ethereum, for example, released the Bellatrix upgrade on September 6th, 2022 employing a proof-of-stake (PoS) mechanism. This was aimed at countering the computational power requirements, which has really worked in Ethereum’s favor, making it the second best crypto blockchain after Bitcoin.
Bitcoin has the highest electricity consumption compared to other blockchains. Its consensus mechanism known as proof-of-work (PoW) is behind these high energy requirements since miners are always competing to solve complex mathematical puzzles in order to validate transactions and add blocks to the blockchain. This process is energy-intensive since miners require powerful hardware that consumes large amounts of energy. Bitcoin’s annual electricity consumption is estimated to be around 95 to 140 TWh (terawatt-hours).
On the other hand, many other blockchains employ less energy-intensive alternative consensus mechanisms, for example, the proof-of-stake (PoS). Using this mechanism, validators are chosen to create new blocks based on the number of coins they hold and are willing to stake as collateral. This eliminates the need for resource-intensive and energy-intensive mining. Besides, other blockchains rely on the proof-of-authority (PoA) and delegated proof-of-stake (DPoS) that depend on trusted validators to secure the network, leading to much lower energy consumption compared to PoW-based blockchains.
Permissionless blockchains (also referred to as public blockchains), like the one used by Bitcoin, have no restrictions, and the system administrator has no control over them. Any user is free to take part in the consensus and validate the data since permissionless blockchain is absolutely decentralized across unknown parties.
On the other hand, a permissioned ledger (also referred to as private blockchains) can only be used by a few authorized people to perform security operations on the blockchain ledger. Only a few people can access the distributed ledger under this type of operation, controlled by a system administrator, with popular ones being Hyperledger Fabric, R3 Corda, and Quorum. The users are accorded different privileges allowing them to undertake certain actions.
A network of nodes controls the operation of decentralized networks, for decentralized cryptocurrencies, unlike their centralized counterparts. In such a system, each node operates equally in terms of authority, eliminating single points of control. This enhances the Bitcoin blockchain network’s security since it’s resistant to censorship.
Centralized blockchains on the other hand operate under one authority. All major decisions are made by the controlling authority and are delegated to subordinates. This arrangement is easy to follow since all parties know who to report to, but is not as secure since it’s prone to manipulation and censorship.
Here are the pros and cons of the Bitcoin blockchain:
Pros
Cons
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A blockchain refers to a distributed, cryptographically secure database structure allowing users in a network to establish a trusted and immutable transactional data record without having to use intermediaries.
Digital transactions occurring in a blockchain network are grouped in a block alongside similar transactions that have occurred around the same time. The block is then broadcast to the network for miners to validate and eventually earn rewards.
A block refers to a set of transactions broadcast to the Bitcoin blockchain as a block for miners to validate and claim rewards. Whenever validated, a block is added to the end of an already existing chain, making it a “blockchain”.
A blockchain transaction ID refers to a sequence of characters assigned to each transaction upon verification and inclusion into the blockchain network.
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