Blockchain Works!

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Blockchain Works!

The birds eye view of the Blockchain process is as follows:

  1. A transaction is requested.
  2. The request is transmitted to the world wide network of computers called “nodes”.
  3. The network of nodes verifies the transaction as well as the status of the person requesting the transaction.
  4. Once the transaction is verified, it is combined with other verified transactions to form a “block” of data.
  5. The block is added to the blockchain using hash functions that ensure that any changes to the ledger at any point in the ledger’s history, would result in an error being detected immediately.
  6. Once the block is added to the ledger, the transaction is complete.

Note that the process describes a “transaction”.  This transaction does not have to involve a Bitcoin.  It can record a land transfer, a contractual obligation, or any other information that needs to be recorded.  Bitcoins are, after all, only information, that represent something.  Bitcoins themselves have zero intrinsic value (they cannot be used like gold, for instance can be used to build conductors, jewelry, or a heat shield).  Nor do Bitcoins have any physical form.

Think of blockchain as a distributed database with a shared list of records.  A group of records is a block, and each block contains the shared history of every block that came before it.

With the algorithms behind blockchain hashed out, it was time to start using it for the purpose it was created – Bitcoin.

In August 2008, was registered.  In November 2008, Satoshi Nakamoto released a paper describing blockchain, and how it was to be used for Bitcoin.  In January 2009, Bitcoin software was released as open source code and Satoshi mined the first block for a payment of 50 Bitcoins.

In its infancy, the value of a bitcoin was negotiated individually on Bitcoin forums.  In one early transaction, 2 Papa John’s pizzas were purchased for 10,000 Bitcoins.  In today’s dollars, that is worth approximately $148,280,000.  It has been estimated that Satoshi was paid 1 million bitcoins for his work mining bitcoins.

In 2010, Satoshi ceded control of development and handed control over to the Bitcoin Foundation, and subsequently disappeared.

For Bitcoin, the blockchain model has a built in virtuous circle.  The various distributed miners of Bitcoin are themselves paid in Bitcoin.  If they should choose to not follow the rules, not only would they be caught very quickly, but they would be undermining the trust and value of the very currency they are being paid in.  It is in their own best interest to ensure the integrity of the blockchain.

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