Bitcoin Explained – Chapter 4: Technical characteristics of Bitcoin

Bitcoin Explained – Chapter 4: Technical characteristics of Bitcoin

29 July 2019

This article examines the technical background of the virtual currency. In order to figure out how the Bitcoin protocol works, it is important to understand various terms. For a better understanding, the different areas and terms of the Bitcoin protocol are divided into 4 different headings:

  1. Blockchain
  2. Transactions
  3. Mining
  4. Proof of Work

Source: Vontobel Investment Banking

1. Blockchain

Without using the word blockchain, the concept of what it is has been described in detail in the Bitcoin Whitepaper by Satoshi Nakamoto. After all, the Bitcoin protocol is a network built in the form of a blockchain. The basic concept of a blockchain is easy to understand: A blockchain is a single chain of blocks which contain information that are arranged in chronological order. This information could be, for example, names, contracts or a chain of ones and zeros. In the case of Bitcoin, however, it is information containing transactions. The Bitcoin protocol is nothing more than a list in the following form: Person A has sent x Bitcoin to person B; person B has sent y Bitcoin to person C; person F has sent z Bitcoin to person K; etc... The key difference to a traditional Excel list lies in the publicity of the list. Anyone with Internet access anywhere in the world can use the technology, download the latest Bitcoin protocol or track, evaluate and analyze the protocol on various websites.  

A sample transaction in the blockchain can be found in the following entry: The Bitcoin user with the address «38sbwkzGiDdmoFKzUVWGS3ssbkq5rEMJCA» sent 0.01822648 BTC to the user with the address «3BWHidrYTkYHWSC5H1TLJLov54QpYUULQR». This transaction took place at 14:07:00 on 26 July 2019 and the size of the information was 215 bytes.

Source: Blockchain.com

At first glance, a list of this kind appears to be extremely simple and uncomplicated. The basic idea and functionality of the blockchain is, as shown above, very simple. The innovation of the Bitcoin blockchain lies more in the background - in the structure and implementation of the Bitcoin protocol.

2. Transactions

As already mentioned, the list entries in the Bitcoin protocol are transactions. A transaction in the Bitcoin protocol is the value transfer between two Bitcoin users. In order for this transfer to take place between Bitcoin users, two things are required first: a virtual Bitcoin wallet, which can be used as a storage medium for Bitcoins, and a digital signature to prove that a transaction has actually taken place.

A wallet is nothing more than a chain of numbers and letters with 32 digits. In the example above, the sequence of numbers 38sbwkzGiDdmoFKzUVWGS3ssbkq5rEMJCA represents the wallet of the Bitcoin sender. The wallet alone does not show who carried out which transaction to whom - it is only the «address» of a wallet. The address of a wallet is also the so-called «public key» of a wallet.

In order to be able to carry out a Bitcoin transaction you need the digital signature – i.e. the «private key» of the wallet - in addition to the wallet itself. The private key is - similar to the public key - a series of random letters and numbers. Unlike the public key, the private key consists of 64 digits. The private key must be kept secretly at all times. Because if a Bitcoin user wants to carry out a transaction, he must sign the transaction with his or her private key in advance.

After a transaction has been completed by signing with the private key, the transaction is recorded in the Bitcoin protocol and after further processing by the so-called «mining process» it is confirmed and executed within approx. 10-20 minutes.

 

 

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21/10/2019 22:08:34

 

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