Bitcoin entered into the mainstream during its amazing run in 2017. Going from just under $1,000 in value for a single Bitcoin at the start of 2017 and almost reaching $20,000 before the end of the year, it generated a lot of hype.
Everyone was looking at ways to buy Bitcoin, no matter whether or not they really knew what it was. Many saw it as a way to get rich quick. However, there are a lot of applications to Bitcoin and its underlying technology that fascinated a lot of people who started to try and learn more about it.
There is still a large amount of people who do not understand how Bitcoin is able to facilitate their transactions. This article will provide a breakdown of just that.
The beauty of the Bitcoin network is that you can vary the transactions you make depending on your specific needs. For example, you can make very simple and minimal transactions if you want.
Alternatively, developers can go to town and encode very complex types of transactions across this network also. This is all thanks to the great cryptography, non turing complete scripting and the relevant data structures.
The main type of transaction this article looks at is the most common and simplest form.
Quick summary
There are a few core components that make up Bitcoin. They are mainly the blockchain and the nodes. The goal of a standard node will be to maintain a version on the blockchain.
It will then update this entry when there is a longer version. The blockchain is quite literally a chain of individual blocks. It is these blocks which hold and conduct the transactions.
If you are sending some Bitcoin, you make this intention public Then the nodes will conduct a scan of the entire network of Bitcoin in order to validate two things. One is that you actually possess the amount of Bitcoin that you are planning to send through this transaction.
The other is that you have not sent this Bitcoin already to somebody else. When these confirmations have come through, you will pass onto the next stage. This is when the transaction will become part of one of the blocks.
This block will then attach itself to a block from the past, which means that it will now be part of the blockchain. Once you conduct a transaction, there is no way you can change or reverse it. This is because you would have to undo every single block that comes next on the chain.
A bit more detail
It is not your wallet but your Bitcoin address that holds your Bitcoin. The Bitcoin address will record every transaction you conduct. This address will be made up of a variation of 34 numbers and letter. It is called your public key.
You can send your public address to anyone, it does not hold any important information and it is what you need to send when you are requesting someone to send funds to your wallet.
Every public address will also have a private key that is made up of 64 numbers and letters. This is, as the name implies, what you need to keep private and confidential. This is effectively your password to your wallet.
When you try to issue a transaction from your Bitcoin address, the private key needs to be used in order to authorize the movement of these coins from your wallet. Therefore, the process to send Bitcoin involves you entering the details of the transaction, such as how much Bitcoin you want to send, as well as the details of your private key.
Why this has been done, there will be the issuance of a digital signature. This will then go to the network for it to be validated.
This validation process is done through entering the private key and public key into a Bitcoin program.
Once these have been proven to be legitimate, the transaction will be validated and there is no disclosure of the details of the private key. The program is able to quickly see if you have already sent the Bitcoin to someone else because the public address will be recorded on any transactions on the public Bitcoin ledger.
The reason why nobody is going to be able to tamper with this public ledger is because it would require them to change every single subsequent block. This would be a never ending process as there will constantly be new blocks added while they are attempting to do this.
Problems with Bitcoin transactions
In the beginning, one of the major draws for conducting Bitcoin transactions was because they were much quicker to process and cheaper than more traditional methods. However, as the network became more popular and more and more transactions were taking place, problems began to appear.
Due to the higher amount of transactions, they began to clog up the network and transactions became slower and pricier to process. This was where the scalability problems of Bitcoin first appeared.
It led to a lot of people leaving Bitcoin and using other coins instead to send and receive money. It also saw a hard fork of Bitcoin, creating Bitcoin Cash which promises ultra quick and cheap transactions. Some people even see Bitcoin Cash as being what the initial vision of Bitcoin should be.
There have been many different solutions proposed for the Bitcoin scalability issues. One of these was through the use of a segregated witness (SegWit). It was activated in 2018 but at the start of 2019, only 36% of transactions use it.
Its goal was to cut down on transaction times and costs. However, these issues network issues have been easing off since the second half of 2018.