In the year 2009, the world changed forever. Not only did Satoshi Nakamoto, the creator of Bitcoin (BTC), release Bitcoin to the world – he also released the world’s first blockchain.
In this guide, we’ll break down what a blockchain is, how it plays a critical in Bitcoin, it’s many applications, and the vast potential of decentralized blockchain ledger technology.
Note, this guide is a very basic introduction, and for deeper insight on it’s mechanics, there are dedicated websites such as New Zealand’s own Blockchain NZ (blockchain.org.nz).
Enjoy, get yourself a beer, put on your thinking caps, and welcome to a future of money.
What is a Blockchain?
In the most simple terms; a blockchain is a decentralized and distributed ledger that records transactions across a network of computers in a secure and transparent fashion.
Decentralized: controlled by many stakeholders or authorities rather than one single one.
Ledger: a book that contains different accounts where records of transactions are stored.
Blockchains are digital record keeping systems where information flow is controlled in a decentralized, peer to peer fashion, rather than by a single entity in control of the ledger.
This is unlike traditional, centralized systems, like a central bank, where all records and transactions are processed centrally, controlled by a single entity maintaining the ledger.
Fundamentally, blockchain’s are a new way of storing information in a trustless, tamper-resistant way, enabling technologies like Bitcoin to operate without a central authority.
How Blockchain Works
To grasp the essence of Blockchain, it’s important to understand it’s basic operational mechanics, using Bitcoin as the example. Transactions on the network are grouped into blocks, and each block is linked to the previous one through a cryptographic hash, creating an unbroken, sequential chain of events, stemming right back to the first BTC transaction.
To ensure the accurate information is stored on the chain, to prevent fraudulent or false entries added to the blockchain – a consensus mechanism, such as Proof of Work (PoW) or Proof of Stake (PoS) is used to ensure agreement between network participants, who validate the transactions and maintain the integrity of the chain of blocks; the blockchain.
Every 10 minutes, the Bitcoin blockchain produces a verified block, a bundle of confirmed transactions, immutably added to the blockchain. A cool way to imagine the block time is as if it is the heart beat of the decentralized blockchain system; almost like Bitcoin and her blockchain is a decentralized, fungal mass. The heart moves blood (transactions) around the Bitcoin super structure; made up of all the Bitcoin users, miners, traders and beyond.
The Bitcoin blockchain is open source code, so anyone can audit and view it’s makeup. If the Bitcoin community wishes to make changes to the blockchain, 50% or more of the the network must vote and form consensus in order for any proposed changes to go through.
If a vote goes through, and a portion of the community isn’t keen on the changes, the blockchain is forked, a brand new blockchain is created, becoming it’s own unique chain.
Okay, timeout. I remember reading this concept for the first time wondering WTF does this actually mean. To really break it down, the blockchain is like a living, breathing document, being altered, audited and used by millions of stakeholders all at once, storing everyone’s BTC and recording everyone’s transactions, making sure every Bitcoin is accounted for.
The consensus mechanism is an automated function of blockchain and Bitcoin’s software (where computers do the heavy lifting, it’s all automated), communicating with all other nodes in real time to ensure the record of transactions and accounts are 100% accurate.
There are many ‘blockchain explorers’ out there on the web; websites that allow you to view all transactions, wallet balances, and activities on chain, dating back to the first block. Go see for yourself, here is the latest block at time of writing on BlockExplorer.one.
Think of the blockchain as a ultra-secure, encrypted self-regulating ledger / record keeping system that stores the data of every Bitcoin wallet and every Bitcoin transaction, ever. The Bitcoin blockchain itself is now 543 Gigabytes in size, and a copy of the Bitcoin blockchain is stored in the computer of every miner that verifies and processes BTC transactions.
As you can imagine, having a copy of the record keeping system across many different locations, ensures that if one country goes dark, the record of Bitcoin transactions live on. This is the essence of decentralization, the key founding principle of BTC and blockchain.
Blockchain And Decentralization
Right, so we have this distributed blockchain, a record of transactions tracing back to the first Bitcoin transaction – but just who and how exactly are transactions authenticated, verified and added to this ledger? This is the role of the Bitcoin miner, a computer holding a complete copy of the Bitcoin blockchain, that runs automated software that processes transactions and communicates with all other Bitcoin miners across the world in real time.
Miners essentially compete with each other to solve a cryptographic puzzle, which by doing so verifies the authenticity of the transactions bundled in the block. Miners are incentivized to process Bitcoin transactions, as for doing so they are rewarded with a small fee. This is called mass collaboration powered by collective self interest. For more information on Bitcoin mining and how that works, feel free to read our dedicated guide.
As a wee personal comment, this is a pretty damn cool concept, millions of computers autonomously communicating in real time, processing transactions on our behalf, with zero actual humans doing any of the puzzle solving. This is why Bitcoin currently holds the title as the world’s largest super computer. We are moving into a digital age, no doubt….
Other Popular Blockchains
Although Bitcoin’s is the world’s first and largest blockchain – there are other significant, alternative blockchain’s running parallel – powering many of the ‘altcoins’ we know today.
The most notable example is Ethereum, and the Ethereum Virtual Machine (EVM); the world’s second largest blockchain eco-system. Ethereum’s blockchain operates with similar intentions to Bitcoin’s; existing for the purpose of keeping a continuous, uninterrupted and immutable record of transactions, balances and on-chain activity.
The Ethereum validators, who use a Proof of Stake (PoS) consensus mechanism, ensure the accuracy and functionality of the Ethereum blockchain, like do the Bitcoin miners.
Bitcoin’s blockchain is considered raw compared to Ethereum’s, Bitcoin being the gold standard with Ethereum offering much more functionality and more complex features. For example, although first coined in the 1990’s, Ethereum’s blockchain is credited for unleashing ‘smart-contracts‘ on the world, allowing anybody to create automated, self-executing contracts involving currencies built on the Ethereum blockchain following an if/then/therefore protocol. Ethereum’s blockchain is also unique in comparison to Bitcoin’s blockchain in the sense that anyone can build a (erc-20) token on top of the existing Ethereum blockchain infrastructure. Beyond Ethereum, there are thousands of blockchains today standing on the shoulders of Bitcoin and Satoshi Nakamoto’s revolutionary work.
Because blockchain’s are open source, anyone can copy the code and create their own version. While Bitcoin is and should be respected as the mother ship, the fact that there are tens of thousands of developers working around the clock to develop this technology ensures that innovation and technological advancement with blockchain technology is maximized. The global blockchain eco-system, at this moment, is a hot pot of open source innovation, decentralized ideology, and trial and error; laying the infrastructure for a new financial system based around freedom of association and financial self-sovereignty.
Criticisms & Challenges
Blockchain technology, relatively speaking, is still in it’s dial up days. There are well known challenges to Blockchain technology, such as issues with scalability, energy consumption and beyond. A breakdown of these challenges are as follows, infused with my opinion..
Firstly, blockchains often catch criticism for having difficulties with scaling; processing the on-chain activity on tens of millions of users simultaneously. In times of extreme volumes of on-chain activity, Bitcoin is known to slow down and Ethereum is known for transaction fees sky rocking. There are however many initiatives being developed by thousands of blockchain developers; such as Bitcoin’s Lightning Network, and Ethereum’s Layer 2. From my own point of view, we’re still right at the very beginning, so to me these are problems that will be solved as technology continues to evolve and adapt into the 21st century.
In regards to energy consumption, Bitcoin currently uses 1% or so of the world’s electricity – roughly the size of New Zealand’s electricity consumption on the world stage. After all, Bitcoin is the world’s largest super computer, 500x times more powerful than the next. Bitcoin’s energy consumption is due to it’s Proof of Work (PoW) consensus mechanism which uses a significant amount of power when blocks are mined by the miners. The PoW consensus method is the most secure, battle tested blockchain consensus mechanism known to man, and Bitcoiners would argue that 1% of the world’s energy supply is worth powering the massive Bitcoin network and blockchain to ensure to succession of financial freedom and financial access for the world; where 50% live under totalitarian regimes.
Ethereum and other blockchains have switched to other consensus mechanisms that require far less energy. It should be said this is a complicated issue, enjoy your research.
Blockchain Use Cases
Beyond cryptocurrencies, there are literally thousands of different, existing and potential use cases for blockchain technology. A couple of my favorites include DAOs (decentralized autonomous organizations) where governance and treasury reserve management is all on-chain, recorded on the blockchain and managed in a decentralized fashion. There’s blockchain voting, where votes for anything, even national elections, can documented and executed on an immutable public ledger, transparently, in an open source way, to improve trust in fair elections. There’s also digital identity, NFTs, electrical power sharing using blockchain (like Australia’s very own Power Ledger), and about a thousand other use cases. This section should act merely as a key-hole into blockchain potential. Would highly recommend simply exploring the Ethereum eco-system to gain exposure to the massive range of projects currently be developed in the web 3.0 / DeFi space.
Future Trends and Developments
As the world moves from Web 2 to Web 3, and the decentralized movement continues to evolve, it is expected that blockchain technology will unleash itself across billions of users, creating a paradigm shift in the way we look at ownership over our own assets and data.
It’s become very clear the world is speeding up, technological advancement accelerating, the rise of AI, computer power doubling every year. We truly are in profound times in terms of what’s right around the corner for humanity and the way we interface with each other in the exchange of information and value. One thing is for clear however, Bitcoin, Ethereum and other cryptos are the life blood of these new systems, the native currencies of the internet. Here to give the legacy financial system a run for their money, and at worst provide legacy systems a reason to innovate and improve. I think over the next 50 years, we will witness the currency wars of the 21st century; the battle for the control over humanity’s financial and global information and power systems, with blockchain powering the decentralized movement. We’re in for an interested ride no doubt, and one of the best things is that you can invest directly in this movement by owning and increasing your knowledge about the native blockchain currencies like Bitcoin, Ethereum and beyond.
Cryptocurrency NZ Final Verdict
This guide is a work in progress, but I hope it’s expanded your mind and provided value in one way or another. If you have anything to contribute to this guide, feel free to reach out.