Blockchain is like a digital record keeping system that stores information on things called blocks, linked together, it’s called the blockchain. It can keep track of transactions or information in a way that's transparent and hard to hack.
So, what is a block? A block is literally just a bunch of data. For cryptocurrencies like bitcoin, it’s a large number of records. They contain all the transactions on the blockchain. For example, one record might contain this: Person A gives Person B 10 bitcoin, Person C gives Person D 0.5 bitcoin, Person E gives Person F 5 bitcoin. Lots of these records make up a block. A block can only have a certain amount of records, so new blocks have to be added to the chain to keep up with all the records. Once a block is filled with transactions, it needs to be added to the chain. This is done by ‘mining’ the blocks.
How does mining work? First we need to understand hashing. In simple terms for example, if I give ‘banana’ into a hashing function, I might get ‘b493d’. There is no way I can find what I put in to the hashing function from the result ‘b493d’, except from trying to hash lots of different things. I could try to hash ‘apple’ gives ‘3a7bd’, ‘pear’ gives ‘97cfb’, and ‘bananas’ gives ‘e4ba5’. Notice that even though ‘banana’ and ‘bananas’ are very similar, they give very different results. Trying to find the input to one of these results, especially on a larger scale, takes a lot of computing power or time. In reality, it takes a single computer years to find the input to a SHA256 hash.
Back to bitcoin – this is why people hear of bitcoin farms and so many miners. It’s because we need so much computing power to find the inputs, or passwords, to these hashes in order to mine a block and add it to the blockchain. The reward for successfully mining a block? As of the time of writing this article, 3.125 BTC, around £150,000. A new block is mined around every 10 miniutes, therefore around 450 (£22M) bitcoins are rewarded to miners every day. Since the reward is so large, the probability of mining a block is incredibly low. Because of this, miners often join something called a ‘mining pool’. Mining pools combine the computational
power of all the individual miners and split the bitcoin reward between them. This benefits individual miners as they might experience long periods without rewards due to the probabilistic nature of mining, joining a pool provides a more regular income stream as the pool collectively mines blocks more frequently.
One of the key features of the bitcoin blockchain is that it is decentralised. Quite simply, this means that anybody has access to the blockchain. They can read all the transactions that have been validated, and they can also try to validate new transactions. This also means that a malicious person can try to add their own transactions to the blockchain e.g. ‘Person A’ pays ‘the malicious person’ 10 bitcoins. However, this is essentially impossible to do, as the majority of miners will be verifying the real list of transactions. Noticing that one of many miners is trying to verify false transactions, the false transactions will not be verified.
Another feature that makes the bitcoin blockchain so secure is that the hash of one block is added to the next block. This means that each block refers back to the last block. Therefore, if someone tries to edit an old block, all the newer blocks change, as the hash of the changed block changes all the newer blocks. So essentially what happens on the blockchain, is basically immutable and written down forever, which is part of what makes bitcoin so good.
In summary, the Bitcoin blockchain is a powerful and innovative technology that reshapes how we think about financial transactions. Its decentralized nature ensures security and transparency, while the use of cryptographic methods protects against fraud and unauthorized interference. Exploring the world of Bitcoin and blockchain can be a step towards understanding not just a digital currency, but also the potential of blockchain technology in all aspects of the digital world.