The Real Bitcoin Technology – 4 Different Components

Bitcoin Technology

When people hear blockchain they associate it with Bitcoin.

Heck they are almost synonymous, although in today’s day and age it is making blockchain seem to be the only technology behind bitcoin.

Bitcoin is composed of four major different technologies, (including Blockchain technology) which we will touch on in this article.

Note: It’s important to have all four of these together, because without them together they are not Bitcoin.

*Thanks Andreas Antonopoulos for helping realize the core components.

True Bitcoin Technology – The 4 Major Technologies

Blockchain Technology:

In order to jumpstart this process let’s begin with one that many people are familiar with, or at least have heard the buzz term.

If you aren’t check out this article from our start here guide – What Is Blockchain Technology?

A Blockchain resembles a database, in the sense that it keeps and stores information (granted if it doesn’t have a few defining characteristics than it is just a database.)

Real Blockchain technology, the kind behind Bitcoin, has five different characteristics:

  • Open
  • Borderless
  • Transnational
  • Neutral
  • Censorship Resistance

Now on Bitcoin, this technology works in a unique way that has never been achieved by a currency, or means of exchange before.

Here’s a sample of how it works:

  • John wants to conduct a transaction
  • This transaction enters the P2P network of computers.
  • The Transaction then goes through a solidification process via these p2p computers
  • In the case of Bitcoin, it is a currency transaction being verified.
  • This transaction has a certain amount of memory and pairs with other transactions to add to Bitcoin’s 1mb block sizes
    • This information in the block is also called digital ledger technology as it is verified by multiple anonymous parties
  • The new block is then added to the blockchain, being chained to the other blocks
  • John’s transaction is complete

Notice the blockchain was not recording that John has 100 bitcoins, but instead that John transacted a certain amount of Bitcoin and it was verified.

The blockchain is keeping track of Bitcoins bought and transacted through it, not what party A and B both own.

It becomes a distributed database that all nodes mining have downloaded, and store information in, which is accessible by anyone at any time.

Making it a trustless protocol, because it is verified and stored, and able to be retrieved at any time.

Now this is a foundation of Bitcoin, and the reason that it is easy to use, and safe to use (if you store and hold it properly.)

Want to learn how to buy and store Bitcoin safely? We’ll send you our free guide through Facebook Messenger below:

 

Transactions can’t be falsified and there is a finite amount of Bitcoin so verification knows whether the Bitcoin is real or not.

A Peer-To-Peer Network

In order to use the blockchain, step two (from above) entailed something called a peer-to-peer network.

What’s a peer-to-peer (p2p) network you ask?

A P2P network is a network formed by two or more people sharing a network, therefore bypassing the means of a third-party.

It’s like John buying something directly from Susan who manufactured it, rather than going to Sears and purchasing the good.

In Bitcoin it’s paramount that their be a P2P network integrated throughout the blockchain as this allows multiple parties with stakes to verify transactions.

By helping to allocate computer resources to verify transactions (mining) you are then able to actually get a percentage of Bitcoin over time, and subsequently are disincentivized for trying to bypass the system.

Think of this P2P system as a community of people, who trust each other because everyone trusts each other, and everyone sees everything occurring in the community as they have every record.

That’s one of the main components of what makes Bitcoin so useful and why the P2P network is crucial to its success.

Not to mention, without the blockchain moving through a P2P source, it would most likely just be a central database (which we get into in this article) defeating of the purpose of it entirely.

Proof-Of-Work

Now in order to ensure that a P2P network is fulfilling its duty, and the transaction actually is valid, you need to be able to prove the work.

This is where Bitcoin’s proof-of-work (POW) structure comes into play.

What is Proof-of-Work?

Proof of Work is a method for proving that something is true and valid, by incentivizing the truth and disincentivizing liars.

The way it works on Bitcoin is through data. A piece of data which is difficult to produce, requiring time and energy (literal energy) but easy for others to verify, helping to satisfy certain requirements.

POW can be a low probability process that can be random so that a lot of trial and error is required, leading to a cost of energy, until finally finding a valid proof of work which elicits a reward (for Bitcoin it is Bitcoin.)

Basically, it still has to spend time and energy doing “wasteful” math.

Bitcoin currently uses the hashcash POW system.

And over time the difficulty and ability to create a valid proof-of-work gets harder and more time-consuming.

Now, this is the consensus model that helps the blockchain verify that work was done and the transaction has actually went through.

It is then stored in the Blockchain, using the ledger technology, as work completed and X moved BTC to Y.

Cryptography

The last part of Bitcoin that truly makes it “cryptocurrency” is cryptography.

(As crypto is short for cryptography.)

One of the most important value propositions for cryptocurrency is its ability to use cryptography to secure it, keep it anonymous, and allow everyone to use it.

With a surge in cryptocurrency popularity, people are starting to unknowingly learn and use cryptography everyday.

Wait… What is Cryptography?

In tech speak, cryptography is the practice and study of techniques for secure communication in the presence of third parties called adversaries.[2] More generally, cryptography is about constructing and analyzing protocols that prevent third parties or the public from reading private messages (1)

Cryptography is how Alan Turing cracked the Nazis code and created the turing machine in the process.

Yet for Bitcoin, cryptography works in a few ways.

Remember how we said Bitcoin uses hashcash as its proof-of-work system? Well that’s one of the main ways that its cryptography works…

With Bitcoin, you start with a public key (or your wallet address) and a private key. When someone sends someone else Bitcoin, they use their public key.

It’s also what you can use to verify that a coin went from one person to another (if you know the identities behind their public keys.) This is the ledger that is stored in each block, and allows each block to verify that the previous block did occur through the POW system.

Hashcash is the verified cost-function behind the POW system, essentially making it harder and harder to verify the transactions over time.

It is not interactive and doesn’t have secret keys that need to be managed by the server making it infinitely scalable (depending on the block sizes.) They use something called SHA-256 which we will get into, in a more technical article, yet let’s summarize what it allows Bitcoin to do.

By using this protocol, Bitcoin blocks do not need to contain serial numbers but instead be verified by their hash which allows it to be both identified and have the integrity verified.

What Does This All Mean About Bitcoin and Blockchain Technology?

See each of these 4 major technologies in Bitcoin have to be together in order to work.

Moreso, with Blockchain technology alone, the five components listed must be in place or simply results to a regular database, nothing special, but somewhere to centrally house data.

With these four technologies active it allows Bitcoin to become a global decentralized, P2P, cryptographically secure currency.

One that can be transferred from Mongolia to Japan in a second with a low cost, and in the volume of just a few pennies.

Bitcoin is a powerhouse, not simply because of blockchain technology but because of the operation and interaction between its major characteristics preventing it from being just another centralized currency.

Want to learn how to buy and store Bitcoin safely? We’ll send you our free guide through Facebook Messenger below:

 

Thanks for reading,

Your GCA Team