The bitcoin blockchain represents a complex feat of innovative technology. This post looks at a few different aspects of the bitcoin blockchain — by the time you’ve finished this chapter, you’ll know pretty much all that you’ll need to know about the blockchain and how it works with bitcoin.
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But first of all, as usual, let’s begin with the basics: What is the blockchain? Put simply, the blockchain is a public distributed ledger offering unprecedented transparency regarding the bitcoin ecosystem.
It is a collection of all bitcoin transactions since its inception in 2009. Every additional transaction is logged on the bitcoin blockchain as well. Yet the technology is capable of far more than just that.
The blockchain is a technological advancement unlike anything is seen before, and its decentralized nature means there is no central point of failure that can bring it down.
To watch a cool video about the blockchain, check out “Blockchain: The Information Technology of the Future” here.
One of the most often asked questions is why this technology is called a blockchain. To understand this, you first need to grasp the concept of a block. If the blockchain were a ledger, you could think of the original block as the first page of that ledger.
Every new block thereafter on the bitcoin network contains a hash (a far shorter, seemingly random sequence of letters and numbers) of the previous network block.
As the result, ever since the first block appeared on the network in 2009 — called the Genesis Block — there has been a chain of transactions, all of which are included in various blocks. And through those blocks, any transaction taking place today can be traced back all the way to the Genesis Block.
Back to the ledger analogy, because each new page in the ledger contains a summary of the previous page or pages, it follows that the size of those ledger pages will increase. That’s exactly what happens to the size of the blockchain as more data is stored within it.
Bitcoin’s blockchain is most widely known for being an open ledger, which means it records all bitcoin transactions of the past, present, and future. Not only is the blockchain a bookkeeping tool, it also presents unprecedented transparency for the financial ecosystem.
And it is that level of transparency that a lot of traditional financial institutions are afraid of. They don’t like to disclose numbers and statistics, whereas the bitcoin blockchain is completely transparent in that regard.
However, there is still a level of pseudonymity attached to the bitcoin blockchain, as individual users or companies are represented by a bitcoin wallet address, rather than by a name or address.
Consider the bitcoin blockchain, from a financial point of view, as a shared database of transactions. Every bitcoin node (a computer constantly running the bitcoin wallet software to detect and validate new bitcoin transactions) on the network owns a full copy of bitcoin’s entire transaction history, from the beginning (2009) right up to now.
In the future, more and more transactions will be added on top of the existing blockchain, creating a timeline of exactly how bitcoin evolved in the financial world.
Additionally, every new bitcoin block is generated in chronological order, as it contains the hash of a previous block.
Otherwise, this hash would be unknown, which would lead to the block being rejected by the network. Furthermore, Bitcoin network blocks of the past cannot be altered, because that would mean any block following a specific block number would have to be regenerated. That functionality is not available, nor will it ever be.
As a result of keeping a public ledger containing all of the previous bitcoin transactions between 2009 and the time you are reading this book, the blockchain continually grows in size.
By the time you read this, bitcoin will have surpassed a 50GB blockchain size by quite a margin. And as more and more transactions are broadcasted on the bitcoin network, the block size will have to increase, leading to an even larger blockchain file size.
In 2014, a new trend started to emerge in the world of bitcoin and blockchain technology. Blockchain analysis is an entirely new market within the bitcoin ecosystem, which has been made possible because of the blockchain’s transparent nature.
Whether or not blockchain analysis will be a curse or a blessing remains to be seen, as the opinions are quite divided at this time.
One thing that helps bitcoin thrive and grow as a mainstream payment method is the acquisition of insights into how people are spending bitcoins — not just in terms of which products and/or services are being bought with bitcoin, but also how long people are holding on to the coins they receive in their wallet.
Just like cash, Bitcoin is meant to be a payment method that can be spent anywhere at any time. Having a detailed analysis done on how long people hold on to their coins could help stimulate bitcoin adoption all around the world.
And that, in a nutshell, is what blockchain analysis does. The positive sides to blockchain analysis are not hard to find.
Bitcoin is still a very young and immature financial system, and detailed analytics give industry experts valuable insights into how things can be taken to the next level:
✓ How are bitcoins being spent?
✓ Where are the newest wallets coming from?
✓ Is the hoarding problem being addressed, or is it growing worse?
All these questions deserve a proper answer, which is where blockchain analysis comes into the picture. It is no secret that some of the “oldest” bitcoins recorded on the network have not been traded in years. Some people claim these coins belong to Satoshi Nakamoto, the creator of bitcoin.
Others argue that these were early adopters who simply forgot about bitcoin after a while and never came back. Or maybe the private key was lost during a hard drive crash and never recovered, making the funds associated to those wallets unspendable.
Making bitcoin more user‐friendly is another hurdle that can be overcome by focusing more efforts on blockchain analysis. For example, most users would find it pretty nifty to receive a text message whenever they sent or received a bitcoin transaction.
Some major wallet providers already offer this functionality, but others do not. Receiving an SMS helps novice users to keep tabs on their spending habits and bitcoin balance.
The blockchain can be used for just about anything you can imagine: tracking packages all around the world in real time, creating copyright claims, fighting online piracy, and bringing an end to counterfeit products. These are just a few of the ideas made possible by using blockchain technology.
Granted, the blockchain has become well known for its financial capabilities in terms of recording transactions. But it is important to remember that blockchain technology is much more than bitcoin the currency.
Beyond the financial aspect of blockchain technology, the blockchain itself allows us to achieve much more than just a transaction ledger.
Several projects are currently being developed that will allow tools such as smart contracts, digital transfer of ownership, and even copyright claims to exist on top of the blockchain. For example, here are two of them:
✓ Factom: A layer built on top of the bitcoin blockchain focusing on recordkeeping and data storage (for example, healthcare records).
✓ Storj: Rewarding users with Storj tokens for storing part of the blockchain on their computer, these tokens can then be used by the user to store some of their own data on the blockchain.
Because of its transparent nature, the possibilities of the blockchain’s technological use are nearly endless, and developers are only just discovering the tip of the iceberg in terms of the blockchain’s potential. And the number of possible use cases increases every day.
In terms of blockchain application development, most of the focus is currently on financial services. That is only normal, as bitcoin is mostly focusing on bringing financial services to people in unbanked and underbanked parts of the world. Plus, the blockchain is best known for being an open ledger.
Yet there is so much unexplored potential in blockchain application development that there is no way to guesstimate what will be coming next. What we do know is that various projects are currently in development, and the non‐financial ones aim to improve various aspects of everyday life.
However, until these applications are put into proper coding, they are only ideas and nothing more at this point.
The idea behind blockchain applications is very similar to that of bitcoin itself: restoring power to the individual user without having to rely on centralized services or companies.
Because of the blockchain’s decentralized and transparent nature, blockchain applications offer unprecedented technological advantages. For more on centralization and decentralization, check out the nearby sidebar.
The blockchain’s technological power comes with a steep learning curve. Developing blockchain applications is nothing to sneeze at.
Even for coders, it takes a while to get acquainted with the parameters and API call (a tool used by developers to call on a specific operation within a platform or application) associated with bitcoin’s blockchain.
The main aim of blockchain application development is improving our everyday lives by bringing transparency and accountability to existing infrastructure. Especially in terms of the financial world, both of these features are desperately needed.
There is still much room left for other areas of technology to be improved by adopting the blockchain and the years ahead will give us a better indication of what we can expect.
Developing a proper blockchain‐based application is a time‐ consuming process, as there is a lot of code to write and potential outcomes to take into account. On top of that, it takes quite a bit of funding to write a new blockchain application from scratch, because developers need to be paid for their efforts as well.
Not that that is something to worry about in the bitcoin world — venture capital investment is still on the rise, despite the falling bitcoin price.
The blockchain is all about creating communities and giving individual users choices they currently do not have. It is often like‐minded individuals who share an idea of how something can be done better who are drawn to each other.
An obvious example would be those who create alternative crypto-currencies, also called altcoins. As a result, blockchain development is not tied to one programming language: Diversification is one of the greatest assets for blockchain developers.
Whether this community spirit continues as blockchain applications become more commercial remains to be seen.
There are certainly some comparisons to be drawn with the current state of blockchain development and the very early days of the Internet.
Centralized versus decentralized
There is a major distinction to be made between centralized and decentralized systems. Centralized systems follow a very narrow path in terms of how a person or business tackles everyday operations, and how customers are treated.
Decentralized systems focus more on the community and its needs by making everyone part of the combined effort:
✓▶ Centralized companies or services indicate that only a few people through a centralized structure can provide that service or product to the customer.
✓▶ Decentralized companies or services allow potentially anyone in the world to provide that same service to anyone else in the world, at any given time, in any given place. By the people, for the people, with the people is what decentralization tries to promote.
Bitcoin has always been looked at as a currency for various purposes, ranging from bypassing capital controls to an investment vehicle and everything in between. Yet people are coming to the realization that bitcoin is much more than just a payment method.
Bitcoin 2.0 refers to the next generation of Bitcoin applications and platforms, most of which will not be focused on the financial sector. Bitcoin 2.0 platforms and apps will use blockchain technology to have an impact on our everyday lives in other realms.
Both bitcoin and the underlying blockchain technology are capable of so much more than just serving a financial purpose, even though that is the bread and butter of this innovative protocol. Granted, there will always be a strong focus on using bitcoin and blockchain technology to further advance the financial ecosystem.
There’s quite a lot of room for improvements, as the financial sector has seen relatively little innovation in the past 50 years.
But there are plenty of other implementations of bitcoin and blockchain technology within our grasp as well, as shown later in this section.
Using blockchains for authentication purposes, replacing traditional and insecure methods such as Facebook or Twitter authentication, is just one of the many examples of what Bitcoin 2.0 can bring to the table.
The potential of bitcoin 2.0 and blockchain technology has not gone by unnoticed. Various financial institutions are looking at ways to implement the blockchain into their existing infrastructure.
Even if these financial institutions don’t see a viable future for bitcoin as a currency, the blockchain aspect could hold a lot of promise for the (near) future.
What makes the bitcoin 2.0 ecosystem so attractive are the blocks of data broadcasted and discovered on the network. Rather than just including transaction information, bitcoin blocks can transfer any type of data between users in a transparent manner.
Digital media assets, copyright claims, and even digital insurance are just a few ideas being tossed around by various developers and engineers in the blockchain space.
Bitcoin 2.0 will also be able to improve the traditional bitcoin exchange model as we currently know it. At this time, most bitcoin exchanges allow users to store, send, and receive digital currency, without any further benefits.
Bitcoin 2.0 technology can bring features such as peer‐to‐peer lending, interest‐bearing accounts, and even the ability to lend financial securities without involvement from an intermediary such as a broker or bank.
Taking things one step further, bitcoin 2.0 applications and platforms can eliminate the need for a middleman as far as buying and selling goods is concerned.
Ownership of goods can, in theory, be tied to a digital token that can be transferred to a different user on the blockchain, simultaneously with a payment for this transfer. In fact, there is a huge potential for a future portion of global e‐commerce to take place on the blockchain.
And what about using bitcoin 2.0 technology to issue a virtual identity card, which can be used by owners to complete verification processes in the bitcoin world and beyond?
Rather than submitting sensitive documents to a third party, who most often store them on centralized servers, a virtual identity card can be verified by the blockchain itself.
The owner of the virtual identity card remains in full control of their data, while the vendor will not receive a storable copy of this information.
Using bitcoin 2.0 technology to create a new breed of the decentralized marketplace is another branch of technological innovation currently in development. Trading precious metals in exchange for fiat or digital currency over the blockchain is just one example.
But other aspects of life, such as digital media, can also benefit from these decentralized marketplaces. Because there is no middleman involved, overhead costs for the artists will be reduced dramatically.
Last but not least, blockchain technology is all about the community supporting this new wave of innovation. And those community members deserve voting rights in bitcoin‐related projects, as well as real‐life situations. Imagine that a local authority wanted to open up its spending plans to taxpayers.
This could be done through an application using bitcoin 2.0 technology whereby plans, budgets, potential options, and most favored solutions could be presented, discussed, and even voted on via this technology. It has the potential to open up, democratize, and legitimate processes and decisions in a transparent fashion like nothing else can.
The end result of the voting would be transparent, while no voter’s personal information would be disclosed.
Creating new decentralized applications and services will be the main purpose of bitcoin 2.0 technology. This wave of innovation will empower any individual to become their own boss and create their own line of work.
Whether that is being a courier for a company or driving people around who don’t like to wait for a cab, remains to be seen — Uber being an example of a decentralized service. In our view, there is very little that can’t be achieved once bitcoin 2.0 goes mainstream.