The best way for you to understand how Bitcoin works is to start with understanding how blockchain works. Blockchain is the technology on which Bitcoin is based. Whatever industry you work in, blockchain technology has important use cases that will impact your life in the near future, and many companies are already investing in blockchain projects.
First off, blockchain is a distributed ledger, like we went over in the last lesson. It is a record of transactions verified by every node on the network. Why is it called blockchain? Each new set of transactions within a given period of time is packaged together and then encrypted. That package is the block. The block also contains the information from the previous block. That way, each block connects with the previous one, creating a chain. Thus, blockchain. This is also how the blockchain retains immutability, or creates a record that can’t be changed. Changing one piece of information anywhere on the blockchain would invalidate the entire chain that came afterward, so all the nodes on the network can easily spot the change and not validate it.
Blockchain technology has several key components that we’ll discuss in depth in the next several lessons.
- Trust – a core attribute of the blockchain is the idea that it is a trustless system; the fact that nodes don’t trust each other is very important.
- Keys – blockchain protects the user’s information, allowing access to transact through internet security technology (keys) instead of disclosing personal information (name, address, telephone number, income, etc.) as one would when opening a bank account.
- Smart Contracts – blockchain can do more than simply provide a network for the exchange of value through coins or tokens. Transactions can be programmed onto the blockchain to take place with prescribed variables or when certain criteria are met. These programmable transactions are called smart contracts.
- Governance – how the blockchain runs.
Cryptocurrencies and smart contracts, as well as being an immutable record, make blockchain a new technology which has many disparate uses in every industry. The next several lessons will dive deeper into how each part works as well as covering some of the important topics in the blockchain space.