How does the bitcoin blockchain work? The simplified version!
Blockchain is the underlying technology on which Bitcoin is developed. The blockchain technology was first proposed in a whitepaper made by the Bitcoin creator/creators Satoshi Nakamoto. Even though many are familiar with bitcoin, not many users know what makes bitcoin possible.
Here we are going to explain the blockchain technology in its very essence. But before we get to how it works, we will first see how the existing banks work.
- You give the bank a request to transfer a specific amount of money from your account.
- The money gets deducted from our account to prevent double spending
- The bank process the money
- The money is then sent to the recipients bank account
The problem with this method is that if you are sending money overseas, or if the amount you want to transfer goes beyond a certain limit, the bank taxes you. Also, there have been many cases of bank accounts being hacked and the payment gateways failing to process transactions
How does bitcoin’s Blockchain overcome the shortcomings of conventional banking systems?
With bitcoin blockchain, the middle entity that process the money is removed completely. So no ruling entity is going to tax you or charge any hidden costs to your transaction.
The basic working of bitcoin blockchain can be summarized as follows:
- The payee sends a certain amount of bitcoin
- The transaction gets recorded on the public ledger (blockchain)
- The recipient gets the bitcoins added to the ledger
The internal workings of blockchain
The miners are the ones who add the transactions to the ledger. An individual transaction or a group of transactions make up a block. The miners add blocks upon blocks to create the chain – The Blockchain.
They receive a certain amount of bitcoins for every block added to the blockchain. Also, the payee has to pay a tiny percentage for the transaction as transaction fees. This is the incentive that a miner gets for adding a block to the blockchain. A payment is only complete when the miner adds the transaction to the blockchain.
Now you may ask how Bitcoin transactions can be safe from hacking. The answer comes in the form of majority consensus (a joint agreement between the nodes on the network). If a miner feeds in irrelevant information into the block chain, the nodes will not validate it, hence that block will be disregarded.
Another reason why hackers won’t be able to manipulate blockchain lies in its public distribution property. The blockchain is shared and updated between all the nodes in the network. It will unimaginable amount of sheer processing power to overwrite every one of them.
Of course this is only a simple explanation without going into the specifics of blockchain, you can refer the complete guide for detailed version.