Bitcoin and blockchain technology came wrapped together in a single package in 2009. You cannot discuss the history of one without the other. The digital currency was released as an open source code, and underlying the system was blockchain technology. Although the distributed ledger technology has since moved on to many other applications, knowing how the first Bitcoin blockchain worked will help you understand the whole blockchain concept.
Why Was Bitcoin Created?
The idea of virtual currencies is not new. We have seen their use in online fantasy games for years now. But the creation of a secure digital currency, without the presence of any central regulator was revolutionary. Satoshi Nakamoto, whoever s/he or they might be, wanted to solve a critical problem that effects currencies across the world – counterfeiting.
Moreover, the solution did not require the involvement of any government regulatory body. The system could also stop the act of double-spending, for example, spending the same unit of currency twice. The decentralised, public and anonymous online ledger could record every single Bitcoin transaction.
Maintained by a network of miners, every transaction was validated in return for Bitcoins. The idea initially generated ridicule and skepticism. But soon, this technology would prove that it had the potential to change global financial systems and other industries as well.
How Does the Bitcoin Blockchain Work?
The transaction ledger is distributed across a peer-to-peer network. In the absence of a central authority, the network participants have to agree on a transaction before it can get recorded on the ledger. This agreement is called “consensus” and is completed through a process called “mining.”
So, suppose Kate wishes to buy chocolates online, she can use her crypto wallet’s private key to transfer ownership of the currency. This transaction record is sent through the Bitcoin network to all participating computers, called “nodes.” These computers, with huge computational power, have miners on the other side, who use trial-and-error calculations to solve a complex algorithm.
This algorithm has been created by combining data from recent transactions. The first person to solve this puzzle (through a unique number), will gain rights to wrap up this bundle of transactions into a batch, called a “block.” So, will the miner get Bitcoins in return? No, not yet.
For the miner to be rewarded with Bitcoin, other miners have to confirm the validity of the transaction. This is to ensure that the same Bitcoin has not been spent twice. In this way, each block gets added to a chain of transactions, with a cryptographic link attaching them to the previous blocks. Every time a new block is added to the chain, the difficulty level of someone trying to steal Kate’s Bitcoin increases. Anyone who wishes to steal will actually have to re-write the entire sequence of transactions, which is very complex.
It is important to mention the concept of “Proof-of-Work” protocol here. For an individual record to be considered valid in the network, it must have proof-of-work to show that overall consensus was achieved. Although highly creative, this consensus method is extremely costly and time-consuming. In the subsequent versions of blockchain, this protocol was replaced by faster alternatives.
What Came Next: The Ethereum Blockchain
Now, experts could see that the technology had far greater uses than Bitcoin and online transactions alone. It could provide a radical change to the internet protocol suite itself. Applications could be built on top of it, just like the Windows OS was built on top of DOS.
However, its source code didn’t allow Turing-complete smart contracts. In came Vitalik Buterin in 2014, with his new project, Ethereum, a platform that allowed blockchain to support this kind of scripting. The platform could now emulate human behaviour, through its Turing-complete smart contracts.
What followed was an era of scores of applications being built on blockchain. Companies made their own cryptocurrencies or “tokenised assets,” to evolve their business models. ICOs became the new kind of venture funding, encouraging innovation in every sphere.
Bitcoin and blockchain technology can rightly be said to be the most disruptive technology in decades. It won’t be long before it changes all our lives, for the better.