Bitcoin and Blockchain 1.0 Explained for the Average Joe in 2018

Photo by Mike Alonzo on Unsplash

Bitcoin is a fascinating phenomenon of the last decade and it is here to say. This article is for the average Joe new to cryptocurrencies in 2018 and is desiring a non-technical description of the technology behind bitcoin.

Bitcoin and the Blockchain (for the average Joe)

Bitcoin, the cryptocurrency as we know it as today, is revolutionary because of the blockchain technology (AKA distributed ledger technology) upon which it is established. The World Economic Forum defines blockchain technology or distributed ledger technology (DLT) as a technological protocol that enables data to be exchanged directly between different contracting parties within a network without the need for intermediaries.

As such, blockchain technology allows for information exchange across connected devices without the need of a central server through which the information is relayed. This exchange of information (known as a transaction) between each node (or party involved in the exchange) is verified and recorded across the network (consisting of every connected node).

Why Blockchain is Important

In a traditional transaction, a third-party entity, like a bank, is involved to verify the transaction and record it into a ledger. The involvement of a third-party entity requires trust and endows the entity with overwhelming power over the transaction. In the case that the third-party decides to take advantage of the transaction, there is little that can stop them from abusing their power. This misuse of power by a third-party entity - the banks - was witnessed during the 2008 mortgage crisis. From this we can conclude that traditional transaction systems are not optimal for transaction verification.

In addition, the centralization of power also leads to a security concern: if the record of the transaction (usually maintained by all parties involved) seizes to exist, there is no longer any proof of transaction. Hence, the blockchain addresses these concerns of the traditional ledger system.

Verification and Propagation on the Blockchain

What does it mean to verify a transaction on the blockchain? On the blockchain, if party A wishes to spend Bitcoin (i.e. perform transaction with another party B), then it must be verified that party A has not already spent their Bitcoin previously.

This verification is performed by other nodes in the network known as miners. Miners compete to perform the verification via a proof-of-work (PoW) process. The miner who completes the proof-of-work first announces the result (of verification) across the network. This is the way in which consensus is reached.

Consensus is vitally important for the blockchain since the blockchain is a ledger that is shared across every node in the network. As such, the contents of the ledger must remain the same on every node. In order to remain the same, all nodes in the network must agree upon the contents of the ledger (in addition to the sequence of transactions).

To elaborate, on a network as large as the Bitcoin blockchain, multiple purchase orders are being placed in a very short period of time (within seconds). However, the sequence of the transactions presented on the blockchain is not determined by the sequence of purchase orders. Rather, it is determined by the sequence of verification of transactions.

Advantage of the Bitcoin Blockchain

The blockchain is an evolution of the traditional ledger system. As such it brings along many advantages some of which are listed below:

1. Disinter-mediation: The equal distribution of authority across the network allows for verification without the need of an intermediary.

2. Immutability: Since every node holds a copy of the ledger, any changes to a transaction on the blockchain can be detected and hence requires significant compute power to successfully tamper with the contents.

Limitations of the Bitcoin Blockchain

Ever since the advent of Bitcoin, many alternative cryptocurrencies have been created in response to the limitations of the Bitcoin blockchain, some of which are listed below:

1. Cost of PoW Algorithm: The PoW algorithm requires significant amount of energy and slows down transaction rate due to its dependency of PoW.

2. Pseudo-Decentralization: The blockchain is not truly decentralized as large mining rigs have been monopolized by a select few. Hence, if these nodes are taken down, the blockchain can be at risk.

Further Readings

Above I have only very briefly discussed Bitcoin and blockchain technology. There is so much more behind blockchain technology that I am unable to discuss in this article. Below I have referenced a few books that I found to be very beneficial to my understanding of blockchain technology that I hope you (the reader) can benefit from greatly.

1. Blockchain: Blueprint for a New Economy (by Melanie Swan)
2. Decentralized Applications: Harnessing Bitcoin's Blockchain Technology (by Siraj Raval)

Author's Note

Thank you for reading my article. In this article I intended to lay a foundation for the reader regarding the technology behind Bitcoin. This way I can go into further technical detail behind blockchain technology. Ever since the advent of Bitcoin, research in blockchain technology has produced revolutionary results. In my subsequent articles, I hope to discuss these technologies in further detail so that you (the reader) can make more informed decisions regarding investment in cryptocurrencies.

If you benefited from this article, please promote this post and follow me on steemit @Omario.