Objective
Bitcoin, blockchain, digital currency, these are the buzzwords which are being talked much now a day specially in financial technology. In fact, blockchain is said to be revolutionary technology and many of the use cases are being discussed and many startups are working on products having blockchain as backbone.
Being new to blockchain and bitcoin, it was difficult for me to understand the concepts and practically do some hands-on exercise on the same. So I thought to share the concepts along with practical hands-on guidance.
Fundamentals
Bitcoin
Bitcoins is a decentralized digital currency networks, which works on the concept of cryptocurrency, whereas bitcoin is the actual digital currency unit used in this system for transactions.
It all started in 2008, when pseudonym Satoshi Nakamoto published a paper on cryptocurrency system introducing the Bitcoin framework. It was implemented as open source code and released in January 2009. Though Bitcoin is called the first cryptocurrency but similar concepts existed before that as well. In fact, the idea of digital cash was first introduced in early ’80s by David Chaum.
Blockchain
The blockchain can be defined as a distributed replicated database that allows secure transactions without a central authority. It can be looked as distributed ledger which is made of records termed as block. The blockchain is shared by all Bitcoin users. It is used to verify the permanence of Bitcoin transactions and to prevent double spending. Each block includes the hash of the previous block. This allows each subsequent block to be linked to all previous blocks.
Beauty of blockchain lies in the absence of a central authority for transaction validation, which in fact is performed by a peer-to peer network throughout a consensus process. Every time a block is validated, it is broadcasted to the network and added on top of the blockchain. Since every block contains a timestamp and a reference to the previous block, the blockchain is fundamentally a time stamping system represented by the chain of all blocks, starting from the rest block. After validation each node updates its local copy of the database. The underlying technology and protocol ensures that even in the absence of single authority the database r blockchain state is consistent.
Address
A bitcoin address is used to receive and send transactions on the bitcoin network. It is like a bank account, which you use for banking in traditional banking system. It is made up of alphanumeric characters. A bitcoin address is also the public key in the pair of keys used by bitcoin holders to digitally sign transactions. It is the only information you need to provide for someone to pay you with Bitcoin. An important difference, however, is that each address should only be used for a single transaction.
Transaction
A transaction is a transfer of bitcoin. When a transaction is made, it gets added as a block in blockchain. The transaction is signed with the private key of the originator. The signature also prevents the transaction from being altered by others once it has been issued. All transactions are broadcasted between users which and usually begin to be confirmed by the network in the following 10 after receiving validate the transaction by the process called mining.
Mining
Mining is the mechanism by the transaction is introduced into blockchain system. The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Miners are actually the participants in the system who lend their computing resources, hence they are paid some transaction fees as well as a “subsidy” of newly created coins. This works as a motivation for the people to provide security for the system.
Bitcoin Wallet
A Bitcoin wallet is loosely the equivalent of a physical wallet on the Bitcoin network. The wallet actually contains your private key(s) which allow you to spend the bitcoins allocated to it in the block chain. Each Bitcoin wallet can show you the total balance of all bitcoins it controls and lets you pay a specific amount to a specific person, just like a real wallet.
In this articles, I have explained some basic concepts related to blockchain and bitcoin. In subsequent articles, I will share more details and some practical examples on above concepts.
Madhukar's Musings 