What is a Bitcoin? What is Blockchain Technology?

What is a Bitcoin? What is Blockchain Technology?

2017 was a year when Bitcoin's price and its hype saw its new peaks. I've seen Bitcoin's value fluctuate a lot. I've seen a lot of people investing in Bitcoins, earning money, losing money without understanding what Bitcoins, Crypto Currency and Blockchain are! Some people say Bitcoin is nothing but just a bubble and it's going to crash soon. Some people say Bitcoin is the future of currency and investments. But what is a bitcoin? And what is all the fuss about? Let me tell you that non technical people can also understand its basics. So, let's start from the bottom!

Types of Network Architectures:

To understand Blockchain Technology, first we need to understand the three basic network architectures. (i)Centralized (ii)Decentralized (iii)Distributed

Centralized network is where there is only one centralized processing authority and rest all the nodes are directly connected to this unit. Decentralized network is where there are multiple processing units and they are connected to each other. And the rest of the nodes connect to any of these processing units. Distributed network is where there are no central units. All of the nodes are connected to each other. In distributed systems, data transactions and information sharing occurs between the nodes directly without any central processor.

                (i) Centralized                           (ii) Decentralized                          (iii)Distributed

As shown in the image, black circles are central units and blank circles are end nodes.

Blockchain Technology :

Now let's go in reverse from here on to understand Blockchain Technology.

What is a Blockchain? Look at it this way, Blockchains are created by connecting multiple blocks. One block points to another and that one points its next one and so on. Kind of like a Linked List. If you don't know what a Linked List is, it's a separate topic altogether. What are these blocks made up of? These blocks are made up of information or data. But what kind of data is contained in these blocks? All the transactions done between the distributed nodes. Now understand, that I'm simplifying a lot of things here. Do you follow me? Okay then, let's continue. All the transactions occurring between these nodes are put together and they are hashed. (This is the reason why bitcoins and other digital currencies using blockchain technology are called Crypto Currencies) If you don't know what a hash is, it's a separate topic altogether. In simple words, Hashing is a process of converting sensible text data into garbled data that makes no sense and no one can read it. Now this hashed version of all the transaction are put into the data blocks. These blocks also contain the hash value of the block created before this one. And the next data block will contain the hash value of this data block. That's how the chain gets created. So no matter how big the Blockchain is, one can always start from the latest block and if he/she keeps going back, at some point they are going to hit the first block ever made in the Blockchain. This very first block is called Genesis Block or Block 0, where everything starts.

Why is it considered safe?

Now, that is the point of using distributed system to implement Blockchain Technology. Normally in centralized and decentralized systems what happens is, suppose, node A wants to send money to node B. Here, node A first sends the information to the central server. This server is some kind of middle party. For this example, let's suppose the middle party is a bank. Then this bank deposits money in the account of node B. Bank authenticates the transaction here. But why should we trust the bank? What if the bank is fraud or malevolent. I know that doesn't always happen. But there are hundreds of mobile applications and websites whose sole purpose is to do these kinds of transactions for people like us. They turn out fraud a lot of times. And people lose their money like this all the time. So there is this trust issue. And one more issue with centralized or decentralized servers is that they are very expensive if they are trustworthy. They have their own charges over the transaction that they are going to charge from node A or node B or in some cases both of them.

Let's consider a Distributed System now. Nodes are themselves the parties exchanging the money and they themselves are the authenticators (Miners are actually the ones who authenticate transactions, we'll have a look at that later in this article.). And record of all the transactions are saved in the blockchain. This blockchain is distributed over all the nodes. All the nodes have its copy of the blockchain. And every time a block gets added to the chain, all the nodes update their blockchain. So records of all the transactions ever happened are kept in this blockchain. And anyone can look at it. Everyone will know if any manipulation of the records is done by malicious people. Hence, it is considered very safe.

What is Bitcoin? How does it work?

Bitcoin is merely an implementation of Blockchain Technology. Buying, selling and exchanging bitcoins, all of these are considered as transactions that are eventually hashed and added into blocks to create blockchain. There are many other Crypto Currencies in circulation just like bitcoins. All of them differ from each other in some minor ways of implementation. ETH (Ethereum) is one another practical implementation of blockchain. But it is kept open source by the creators, where Bitcoin is not open source. Ripple, Litecoin and there are many other like this.

There are two kinds of bitcoin users. First is just regular users like you and me who do the bitcoin transactions. Second kind is called Miners. Miners are also nodes in this distributed networks. Miners are the ones who mine bitcoins. Now, think of the bitcoin as a mineral that has to be mined from the earth. Miners dig and mine the bitcoins. And this is how more and more bitcoins keep coming in circulation. For this, we have to understand what mining is.

What is Mining in context of Bitcoins?

Mining is nothing but calculating hash of plain text transactions like we were talking about. So were you confused earlier about who is creating blocks and hashing them and adding them to the blockchain if there are no central servers to do these things? Well you should have been, if you were not. So Miners are the ones who do all these things. They can be anyone. They can be you, me or any other user with proper tools to mine. Yes, you heard me right, if you want to mine, of course you'll need some specific tools. These tools can either be a software or a hardware. 

What basically miners do is, as what they say, guess. Guessing is done by solving problems. Mathematical problems. Which is nothing but calculating hashes of the blocks. Every time users do a transaction, that transaction is added in the pool of transactions. These transactions have to go through miners. Miners are supposed to check the whole blockchain and conclude if the transaction is valid or not. What they check in the blockchain is, whether the sender has enough bitcoins to send the amount? Whether he has received the amount of bitcoins in the past that he holds right now or not? Whether the receiver is authorized to receive bitcoins or not? And probably many other things. This is how a Miner validates the transaction.

These validated transactions are now ready to be added to the blockchain. So Miners now gather set of transactions, put them together and they have to solve the hash puzzle. They have to guess an exact hash that is supposed to be representing the next block. In order to guess the right hash, they can add or remove transactions from the blocks at their will. Once they get the right hash, they add the block in the blockchain. And blockchain gets updated. (I will not get into the details of hashing since it gets very technical after that and this article is also for non geek, non techies.) To remove the element of frauds happening, the blockchain gets updated after every specific period of time. For example, it can be 10 minutes or something like that. 

So, Miners basically have two tasks : Validating transactions and Hashing the blocks

Rewards for Miners :

Now, you would think, why would a miner do these tasks if they are not the central authorities. Well, it is rewarding. Miners do these tasks, they get rewarded. Every time a miner solves a hash puzzle, they are rewarded with 12.5 bitcoins. Woah! Isn't that amazing? Well it kinda is. They get rewarded also when they authenticate transactions, it is not as much as 12.5 bitcoins though. It basically depends on the amount being transacted. But the catch is, only the miner solving the hash puzzle first, gets rewarded. And currently there must be thousands of miners in world. Earlier it was easy to use personal laptops to install mining softwares and start digging bitcoins, since there were not a lot of bitcoin users and miners and also there were not a lot of transactions. So hashing them was easier in bitcoin's earlier stages. But currently, one cannot mine bitcoins without a dedicated hardware machine that is used only to calculate hashes. These machines are expensive and mining softwares have also become very expensive. So it is a lot of investment attached with the mining. No matter the number of transactions, one block gets created every 10 minutes. That is how it works.

Miners have also started making mining groups, where multiple miners gather and try mining together. And if someone cracks the hash puzzle, they simple share the reward. Which makes it just a bit easier. But it is still very difficult to earn bitcoins by mining. I personally do not suggest it.

At first, the reward value was 50 bitcoins, but the rule is that the reward value gets halved every time 210,000 blocks are created. So 50 became 25 in November 2012, and then it became 12.5 in July 2016. Bitcoin was designed in a way that there can only be maximum of 21 million Bitcoins in the circulation. So according to the logic, after 64 halving events, all the Bitcoins will be in circulation.

How is the price of one Bitcoin determined?

Well, to determine the price of one bitcoin, many factors are taken into consideration. Which includes the number of transactions happening everyday, transactions in the pool, number of miners in the world, number of bitcoins in circulation, number bitcoins yet to come into circulation, current price, number of user using bitcoin and maybe many more. But according to me, its foundation is demand and supply. It is somewhat similar to the stock market. Some people say that Bitcoin bubble will crash soon. Some people say it has potential of going up to hundreds of thousands and even millions per Bitcoin. But obviously, nothing is certain about it. You can call it a scam or you can call it an opportunity but the truth is, people really have made good amount of money with the help of Bitcoins. 

Who created Bitcoin?

Satoshi Nakamoto is the name that the creator of Bitcoin goes with. Initially, no one knew who the creator of Bitcoin was. In January 2009 the creator of Bitcoin started a forum page called Bitcointalk. There he claimed that he created Bitcoin and said his name was Satoshi Nakamoto. Also when technical people in the industry observed the Blockchain and went and checked the Genesis Block, they came to know it was created by someone named Satoshi Nakamoto. But no one really knows who Satoshi Nakamoto is. He claims to be a Japanese. But he can very well be from any part of the world. And there are lots of discussions going on about it all around the world. Also it is said that Satashi Nakamoto had taken enough amount of Bitcoins in the beginning to make him a multi millionaire or a billionaire in today's currency.

I hope it was a good read for you all. Thank you for reading!

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Niket Sagar