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Blockchain technology
Bitcoin is a modern marvel consisting of a beautiful mix of well-integrated PhD-level computer science and cryptography with expert-level game theory and economics. That being said, Bitcoin is simply a shared ledger. An ultra-accessible and unalterable list of transactions called a blockchain. If you’re more of a visual learner, here’s a great explainer video.
This blockchain LEDGER serves as a continuously growing list of records called blocks, which are linked and secured using cryptography. Each block links back to a previous block, containing a timestamp and transaction data. This makes them tremendously resistant to modification, i.e. immutable.
What is remarkable about this boring, immutable ledger is that it consists of every transaction ever executed on the network dating back to its creation (~630 million!) AND it’s completely public and verifiable. Anyone at any time can view/audit/verify these transactions and maintain their own list. This is immensely powerful! Blockchain enables an irrefutable record of information that once accepted onto the chain, cannot be retroactively altered. Because of the cryptography involved, changing just one block alters ALL of the previous blocks in existence. This means that if you want to change the current block (to say award yourself some bitcoin), you must change Bitcoin’s entire history, which requires an immense cost and collusion of the network (discussed in sections below).
In an oversimplified analogy, imagine that as transactions are confirmed on the blockchain (more on that in a bit), each Bitcoin user documents every single transaction into a spreadsheet. This means that there are 10,000+ people at all times maintaining an up-to-date written record of transactions. All 10,000+ are cross-checking their records for inaccuracies, creating an incredible amount of redundancy built into the system. This means in order to cheat or alter any transactions in the network, an attacker would need to defraud over 5,000+ people (51%) who are always looking to maintain complete network accuracy because it is in their best (financial) interest to do so.
The built-in default defensive properties afforded by cryptography combined with the costliness to conduct on the blockchain means that Bitcoin is perhaps the first of ANYTHING in which it is more difficult to successfully attack than to build/participate. Think about it. It’s much more difficult to build a house of cards than to knock one down. It’s also much more difficult to build a rocket ship than to blow one up. Cryptography makes the difficulty/cost of an attack much greater than the cost of defense.
So, the blockchain IS the ledger. More literally, a blockchain is a series of time-stamped chunks of data (called blocks) created and verified by the peer-to-peer network of Bitcoin computers, which is secured using cryptographic principles. The time-stamping enables transactions to be audited and provides proof of if and when a transaction took place. The peer-to-peer network and lack of central authority removes the need to trust anyone to process/complete/fulfill your transaction. The cryptography allows users to remain pseudonymous and enables the network to provide immense amounts of security behind each transaction while making them easily verifiable.
And this brings us to “mining”
Some questions still remain like:
- If no one controls it, where do bitcoins come from?
- How are they created?
- Why would anyone bother keeping this incredibly long ledger of every transaction ever?!
These questions relate to what is known as bitcoin “mining.” This is the name given to the individuals (well, actually it’s the computers doing the work) that find/create new bitcoins because similar to mining for actual gold, “miners” perform some amount of work before discovering the scarce asset of value.
Miners are the international network of computers that:
- bundle bitcoin transactions into the blocks (if the block gets filled, the remaining transactions will be added to the next block)
- send the blocks out over the network to be cross-checked and verified OR they will check other’s incoming blocks for accuracy
- propagate approved blocks across the network to let other nodes know and move on to the block of transactions
Miners are extremely important to the health of the network and the idea to include the process of PoW mining was one of Satoshi’s key innovative ideas. In short, they are responsible for new Bitcoin block generation and adding blocks to the blockchain but beyond that mining aids in:
- Securing the network and preventing corruption from malicious actors
- Minting new bitcoin into circulation in a predictable, predetermined manner
- Maintaining a historical record so that the chain remains auditable and transparent which allows global consensus to be reached
In order to actually do all this, bitcoin miners must try and solve incredibly-complex cryptographic puzzles by essentially guessing random numbers and running them through a cryptographic function called a “hash” until they have guessed correctly, or until someone else has beaten them to it. This is a block selection process meant to be attack-resistant known as “Proof of Work (PoW)” and it is an ingenious way of deciding who gets to add the newest data to the blockchain in a decentralized manner.
Once a miner has solved the puzzle and found the correct answer, they will send their work across the network to be checked by other miners. After all, the entire network must come to a consensus about whether or not this block (and the transactions inside) are indeed valid. To reach consensus among the tens of thousands of distributed miners (nodes), Bitcoin uses the established rule that the longest/strongest chain wins, i.e. the chain with the most computational work behind it. This rule ensures that the proposed block has the required work performed. This is referred to as “Nakamoto Consensus” and as long as a majority of CPU power is controlled by honest nodes not cooperating to attack the network, they’ll generate the longest chain/most work and prevent attackers on the network.
Would-be attackers who act maliciously have their blocks rejected (because they do not agree with the current shared, global consensus) and lose out on the bitcoin reward. Not only that, but they also bear the cost associated with PoW mining, thus incurring the cost of electricity without compensation.
Why would miners run these huge computer farms just to solve a quirky puzzle? It’s because they get paid in bitcoin for every puzzle they solve or block they add (called a block reward), and for every transaction they process. That’s how bitcoins are born. Every ten minutes, a new block is produced and new bitcoins are created. The Bitcoin system was set up so that it becomes progressively more difficult to “mine” bitcoins over time. This adaptive structure of the network allows for a very predictable supply schedule including predetermined “halvenings.” In May 2020, Bitcoin underwent its 3rd halvening in which the issuance rate of new bitcoins gets reduced by 50% or halved. These will continue approximately every 4 years until all 21 million bitcoins have been created sometime around 2140. After that, the miners will no longer get new bitcoin, but will sustain their operations through transaction fees for their work.
PoW and Nakamoto Consensus combined provide security to the network and beautifully align incentives for the miners to keep the system running. This block-producing process deters attacks on the network by requiring extremely large amounts of computing power on behalf of the attacker. Since there is so much competition to solve the puzzle and earn bitcoins, a potential malicious actor hoping to “Double Spend” and steal bitcoin, or alter the Bitcoin blockchain in any way would have to spend an astronomical amount of money just to buy enough specialized mining computers and run them (electricity costs) just for the chance at solving the puzzle first. In addition, the beautiful irony is that if anyone DID corrupt the Bitcoin network, it would cause panic among the users and the price would crash thus making the new bitcoins that our bad guy just claimed, worthless.
