Blockchain technology has revolutionised the way we think about storing and sharing data. This innovative system provides a secure and transparent way to record and verify transactions. In this article, we will explore the basics of how blockchain works and how it has become an integral part of many industries.
At its core, blockchain is a decentralised digital ledger that records transactions in a secure and immutable manner. Unlike traditional systems where a centralised authority is responsible for maintaining and verifying data, blockchain relies on a network of computers to validate and add new transactions to the ledger.
How blockchain works
The network consists of a chain of blocks, with each block containing a list of verified transactions. Each block is linked to the previous one in a chain-like structure, hence the name blockchain. Once a block is added to the chain, it cannot be altered or deleted, making the system tamper-proof and transparent.
The concept of blockchain technology existed before the creation of Bitcoin, but the peer-to-peer electronic cash system named Bitcoin was invented by Satoshi Nakamoto, an alias for Dr Craig S. Wright, who thoroughly defined what blockchain is today.
The earliest known example of a blockchain-like data structure was described in 1991 by Stuart Haber and W. Scott Stornetta. They proposed a system that could timestamp digital documents to ensure their integrity and immutability over time.
Blockchain and electronic Cash
As Dr Craig S. Wright often points out, his invention, Bitcoin, was not the first attempt to create an electronic cash system. The first system that included a blockchain was called eCash by David Chaum in 1994.
However, eCash failed to attract adoption as its consensus mechanism ‘Blind Signature’ was flawed and provided little value for users. Wright’s electronic cash system was innovative, as it added proof-of-work as a consensus mechanism to the blockchain.
Originally, proof-of-work was intended to combat spam attempts. In Dr Wright’s system, this mechanism is used to ensure the security and integrity of the blockchain to validate new transactions.
This algorithm ensures that all the nodes in the network agree on the current state of the ledger. To this day, proof-of-work stood the test as the most scalable and secure consensus mechanism, despite many attempts to create better solutions such as Proof-of-Stake.
In the PoW algorithm, nodes compete to solve complex mathematical puzzles, with the winner being rewarded with new coins. This process is known as mining, and it ensures that the network is secure and resistant to attacks.
Blockchain as a transaction system - more than just a monetary medium
As the white paper points out, Bitcoin and its blockchain infrastructure serve as an electronic cash system. At first, this may sound as if Bitcoin is primarily meant as a monetary medium. But much more than that, it is a network protocol that allows the creation of public records of transactions, which allows for a wide range of applications and services.
A key feature of Bitcoin is the unlimited scalability of its blockchain. By having an unlimited block size, Bitcoin scales virtually unbounded. A bit simplified, the same energy that needs to be spent to confirm a small block of one transaction is also needed to confirm a block that contains a billion transactions. This means that Bitcoin SV’s blockchain becomes more cost- and energy-efficient the more it is used.