When you talk about buzz words, “Blockchain Technology” is as buzzy as it can get right now. So lets talk about what exactly is blockchain!
First things first – bitcoin is not blockchain and blockchain is not bitcoin. Blockchain is the technology that bitcoin uses. Both of these seem to be synonymous to most as both technologies were released together and released by the same person or persons – thats right, blockchain is the brain child of Satoshi Nakamoto. So you can have blockchain without bitcoin, but you cannot have bitcoin without blockchain!
What is Blockchain?
In its purest definition, Blockchain is decentralized distributed database, which maintains an ever growing list of transactions within a given environment (in this case the environment is bitcoin). So let’s break down what that means piece by piece because even while writing that out my head was spinning!
First lets talk about the difference of something being centralized versus decentralized. If you look at the image below, on the left you will see a system which is centralized and to the left is a system is decentralized. An example of a centralized system would be a bank. Before bitcoin, any transaction you would want to make would have to go through your bank. This obviously gives the banks a lot of authority as all transactions have to go through them.
bitcoin follows a decentralized model. This means there is no one entity, whether it be a bank or government which controls the transactions within the bitcoin environment. This is similar to the internet. Think about it, is there one government or country which owns and controls the internet? It exists based on the users who use them and this is the same logic behind bitcoin and blockchain. So if you look at the image below, specifically the decentralized on the right, you will see there is no one central node. These nodes are interconnected and interdependent.
Now lets talk about what a Blockchain is and what it “looks” like. The image below portrays what a blockchain looks like. On the left you have blocks that have been accepted within the chain and Block X is the current block. So what the heck are these blocks and what do they represent!?
What a great question young grasshopper! Lets take a look at the image below. As displayed, Block X is the current block. Each block gathers all the transactions that take place within the bitcoin system at ten minute increments. So lets say its 9 pm and the last block was just accepted within the blockchain. Our current block (block x) will wait till 9:10 pm and gather all the transactions taking place. If you look at the image below, you will also see that this block contains a Secret Code….gasp!
Now the obvious question is why does the block need to have a secret code? Well if you look at the image below you will see that there are hundreds, thousands and maybe even millions (one day) of miners within the bitcoin system. Each of these miners are looking to validate the block so it can be added to the blockchain. So how is the system supposed to decide which miner gets to validate the block? Why would these miners even want to spend effort in validating the blocks, what do they get from it? Let’s see the answer to these questions below!
Each miner will try to solve the current blocks current code. The first miner to solve the code will be awarded with all the transaction fees from the block as well as 25* bitcoins. There are two reasons why the bitcoin system rewards miners with 25* bitcoins, first being as a reward so miners continue to mine, which is what keeps bitcoin alive. And it also rewards them with 25* bitcoins to introduce more bitcoins into the system.
Once the block is validated it is then added to the existing blockchain and the entire process starts again with the next block! And there you have it. You have basically understood the blockchain process.