Bitcoin is a completely decentralized, peer-to-peer, permissionless cryptocurrency designed by leveraging the underlying technology called Blockchain.
- Completely Decentralized:
- No central party for ordering or recording, or controlling anything such as currencies.
- Compare to the Banking system, which is centralized and compliant to Government institutions’ rules and regulations.
- Peer-to-Peer:
- Software that runs on machines of all stakeholders to form the system.
- We do not have a central system with which all the peers are connected. Rather, we have a complete decentralized system where individual peers are connected, and they share the information among themselves.
- Permissionless:
- No identity; no need to signup anywhere to use; no access control – anyone can participate in any role.
- Anyone can join the bitcoin network and performs the transaction.
- How can we ensure the system’s security, as the persons who are joining the network are not authenticated? They can be malicious or perform malicious activity. The system should have the mechanism to sustain and preserve integrity in the presence of such kinds of malicious attacks.
This was the interesting concept that has been put forward in this Bitcoin architecture.
Bitcoin Value Proposition
How Bitcoin works
As we discussed in the earlier notes about the public ledger, the same thing is applied here. Now we are storing transaction information in a block. So every block contains the transaction information. In the above example, blocks contain single transaction information. Example:
- Block 1: A = 100₹
- Block 2: A -> B 50₹
- Block 3: B -> J 30₹
However, in actual Bitcoin blocks contain multiple transactions. Indeed it may contain more than 1000 transactions in a single block.
All these blocks are connected using the concept of a hash chain. The advantage of hash chaining is that it requires re-generation and updation of all the subsequent transaction hash values to alter a single transaction record from a block. The blockchain copy is available to every individual party, such as Alice, Bob, Eve, and Jane. The case of a fraudulent transaction by an individual can easily detect by others by verifying the old records that existed in the blockchain.
In general, whenever there is a transaction, those transactions are included in the existing blockchain, and all the individual parties receive updates from the other network nodes. So, in the long run, blockchain size will gradually increase.
The Bitcoin Transaction Life Cycle
- Alice wants to send some money to Bob. Alice opens her Bitcoin wallet, provides Bob’s address, the amount to transfer, and sends.
- The wallet constructs the transactions, signs (Digital Signature Scheme) using Alice’s private key and broadcasts it to the network.
- For example, Alice -> Bob 50₹. As the network is Peer-to-Peer, everyone is connected to each other through some means.
- The network nodes (Alice, Jane, or Eve) validate the transactions based on the existing Blockchain (Old transaction records) and propagate the transaction record to the miners.
- The miners are the special node exists in the Blockchain network.
- The task of the miner is to include the transaction to the next block to be mined. That means the miner’s task is to collect all the clients’ transactions, which were there for, say, the last 10 minutes, construct a new block, and then apply a mining mechanism.
- Mining is a procedure to construct a new block and add this to the existing blockchain through cryptographic hash computation.
- Every block is connected with the next block through a cryptographic hash function by miners. However, generating a specific kind or pattern of the hash value is computationally difficult and time-consuming. Still, it has to be solved by the miners; then, only the miner can add this block to the blockchain. This process is called Proof of Work, and for doing this work, the miner earns Bitcoins.
- Once one of the miners or sometimes more than one miner solves the problem, they can connect that block with the existing blockchain. This is the broad overview of the entire methodology of Bitcoin.
- The updated blockchain is propagated in the network by the miner. It means every participating node in the network receives a copy of this updated blockchain.
- Once they received included Bob. Bob’s wallet software looks into the updated blockchain and updates the wallet if any legitimate transaction exists by his name.
References:
- NPTEL lecture series on Blockchains Architecture, Design and Use Cases by Prof. Sandip Chakraborty, IIT Kharagpur.
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