Blockchain: Bitcoin's Intrinsic Value

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A core functionality to the blockchain is the decentralized ledger. A ledger is a collection of data and that’s exactly what Bitcoin’s ledger is. A collection of data grouped in blocks and chained together. The decentralization aspect is achieved through peer to peer hosting, similar to infamous BitTorrent applications such as Limewire. In our centralized financial system, Bank of America, Wells Fargo, Chase, Capital One, etc have servers where they host their customer’s data and centralized ledgers. A primary function of bank’s and financial institution’s centralized ledger maintenance is to prevent double spending ie. someone spending the same dollar twice. 

 

Instead, the Blockchain & Bitcoin transactions rely on decentralized nodes, which are essentially computers owned by people that have downloaded the public software. There are different types of nodes that serve different functions. There are storage nodes (or full, archival nodes) that store the entire blockchain, from the genesis to now. This means they store every single transaction ever made and to be made. Stored in blocks of course. There are also lightweight nodes that communicate with the full nodes and store pieces of the blockchain; hence the name lightweight. They store enough to be able to verify transactions and maintain the integrity of the blockchain. Then there are mining nodes, which store the complete blockchain and verify transactions like full nodes but they also add transactions (or blocks) to the blockchain. Mining nodes are the only nodes that add transactions, or blocks, to the blockchain.

 

Now that you understand where Bitcoin transactions end up. Let’s look at how they end up there. This famous Bitcoin image will represent one transaction. It’s important to note that Bitcoin is simply data. It is not a tangible thing like this popular image people think of. When somebody indeed buys and sells (or sends or receives), they create a new piece of data that is validated by cryptography and stored on the decentralized nodes. 

 

Most transactions are created using some kind of software wallet, generally on a smart phone or computer. The wallet owner creates the transaction by specifying how much Bitcoin to send and which address to send it to. By submitting the transaction to the blockchain, the transaction officially enters our blockchain compound and begins to communicate with the blockchain. The nodes verify that the digital signature included in the transaction checks out with the sender’s address to ensure that the sender indeed has the Bitcoin he/she is trying to send. For example, if the sender has one Bitcoin and is attempting to send .5 (or half) of one Bitcoin then the nodes would verify the sender has the necessary Bitcoin on hand to process the transaction.

 

It’s important to note, these transactions have been communicated to the blockchain but not added. In a sense, the blockchain knows the transactions exist and have given them temporary approval, but the blockchain has not officially added the transactions to itself. That is where the mining nodes come in! 

 

Mining nodes are owned and maintained by a Miner, which is simply a human with the necessary hardware and software to host the full blockchain and add transactions to it. Miners look for pending transactions and group hundreds to thousands of them together to form potential blocks to be added to the blockchain. Approximately every ten minutes, a new block gets added to the blockchain.

 

Since each block is mined one at a time and each block is linked to the one before and after it, the mining process gives the blockchain the necessary chronological element to prevent double spending. Mining nodes also create brand new Bitcoin with every new block, that is Bitcoin that does not have a sender but is instead created by the blockchain as a reward to the miners for their role and assistance with the blockchain. There is a reward because the mining process is like a public lottery for miners called the proof of work system. 

 

Since only one block can be added approximately every ten minutes, only one Miner can be the one to mine that block, or win the ten minute lottery. And doing so is not an easy thing, which is why it’s called proof of work. For a mining node to mine a block,  the hardware and software goes through very intense and extensive, brute force trial and error math computations to essentially find the missing piece of an advanced math puzzle. All miners are grouping the same transactions, or data, but every component matters in these advanced math puzzles. Since each mining node has data that is being mixed with the transactional data, each mining node gets different answers when attempting to solve for the puzzle. There is not only one right answer, but there is only one first and every mining node is trying to be the first to solve one of the correct answers. Once a mining node finds one of the answers, it submits it to the other nodes as its proof of work; proof that it completed the necessary computations to solve the puzzle without the other nodes needing to necessarily “see” the work that was done. LIterally, think about a puzzle. If I showed you a competed 1,000 piece puzzle, it would be my proof of work. You can look at it and know a lot of work went into it without needing to watch a video of the process.

 

Once all the other mining nodes agree that the proof of work meets the public standards, the block, and all its transactions, gets added to the blockchain. Any verified but unmined transactions that did not make that block, will be added to other miner’s blocks as they solve for the puzzle to become the next winner of the ten minute lottery. 

 

It is very important to note that once a block gets added, it is now used to verify any unmined transactions. Therefore, if someone attempted to double spend and create two transactions spending the same Bitcoin, one of the transactions would get rejected because the first one to get mined and added to the blockchain would block the other from being mined. As you can see, there is a lot to the mining process and it’s crucial to Bitcoin’s existence, functionality and value.

 

That is the Bitcoin’s transaction lifecycle in a nutshell. This process continues to repeat over and over and over and over with minimal human interaction. New transactions continue to get created, then verified, then blocked and chained approximately every ten minutes. The blockchain is like an automated data factory and that is where its intrinsic value lies. Data is a billion, maybe trillion dollar industry and nothing on the planet does data like Bitcoin’s blockchain.

"By submitting the transaction to the blockchain, the transaction officially enters our blockchain compound and begins to communicate with the blockchain. The nodes verify that the digital signature included in the transaction checks out with the sender’s address to ensure that the sender indeed has the Bitcoin he/she is trying to send."

It's important to note that no person actually ever owns Bitcoin. Instead, we own the wallet that holds the Bitcoin. And when I say "own the wallet," I'm actually referring to the Public Key and Private Key that the wallet software created. 

Public Address = Like a home or business address tells the mailman where to deliver mail, the Bitcoin address is the unique identifier that wallets use to send/receive coins with.

Public Key = a 160 bit hash of the public number address where Bitcoin is sent to and from 

Private Key = a 256 bit (EXTREMELY LARGE) secret number *directly* linked to the public key

Quick note for clarification: The Public Key is not the actual public address that Bitcoin, but the public address is derived directly from the Public Key. 

 

Next we will dig deeper on that part; the transaction verification process. There's this thing called an elliptic curve and the blockchain functions off it. 

To increase an Asset account, a Debit entry is made. Conversely, a Credit entry decreases an Asset account. Pretty simple right? So let's say you transfer $100 from Checkings to Savings.