Bitcoin’s wildly volatile price swings have dominated recent headlines, but few really understand the inner-workings of cryptocurrency and the blockchain.
The first part of the Bitcoin blockchain is the ‘ledger’. This ledger is a list of every transaction ever made on the blockchain. The key aspect of the Bitcoin ledger is that it is not stored in a single central location. Instead, it is distributed to everyone and anyone, and everyone has the same copy of the ledger.
Anyone who wants to transact on the blockchain can use a program to create a ‘wallet’. No personally identifying details need be provided when creating a wallet, allowing users to transact anonymously.
When sending Bitcoins to another wallet, the software announces the transaction to the entire network of users. It is the equivalent of handing someone a $20 note, and having everyone see it and remember it happening. Instead of a central bank, a group of individuals called ‘miners’ compete to process the transactions. Every 10 minutes, all the announced transactions are grouped into a block. The miners are competing to solve a difficult puzzle for each new block. Solving the puzzle takes a lot of computing power. The miner who gets the answer to the puzzle first gets to validate the block to be added to the blockchain. That miner announces their version of the past 10 minutes of transactions to the rest of the miners, and the block is added to the blockchain.
As an incentive to keep everyone mining, this winning miner receives the block reward (12.5 Bitcoins). The reward is also the incentive to keep everyone honest. If a miner solves the puzzle, but proposes a different version of the transactions (e.g. paying themselves extra coins) then the network will reject the block, and the miner will not receive the reward. When the block is added, it is linked to the previous block.
The linking and cryptographic puzzle solving creates a ‘digital wax seal’ making it practically impossible for an individual to hack the blockchain and pay someone twice with the same Bitcoin. The Bitcoin blockchain has never been hacked since its inception in 2009. With a current market capitalisation of over $100 billion dollars, the Bitcoin blockchain represents the world’s biggest unclaimed bug-bounty. It is this trust and proof in the technology that allows two people to transact with each other without a central intermediary.