Let me explain Bitcoin from scratch . So consider BITCOIN = Ledger – Trust + Cryptography
For using cryptocurrency or bitcoin you do not have to actually know how it works in back end. Similarly when you transfer money or use your visa or master card you do not know how the transaction works in back end . However in this blog i will share some light on explaining What actually BITCOIN is
Lets first try to understand how current banking system works . When we do any banking transaction banks have systems and people who verify our transactions, a central Authority. In bitcoin there is no central authority who verifies the transaction, its the clever system based on some math ( Digital signatures + cryptography) who verifies the transaction
Now for a moment just set aside the term Bitcoin and just concentrate on Ledger the method of how we record transactions
A ledger is set of records kept to manage transactions. Say we keep a ledger of Petty cash transactions happening on daily basis. Or a ledger of household expenses shared by roommates living together and end of the month they tally and settle everything. Here come two main protocols for maintaining the Ledger
- Anyone can write in the ledger
- Settle up end of each month
Now here comes the first problem if anyone can write in the ledger i can write Cj pays Dj $50. How can we prevent such entries which are not valid .
To solve that we bring digital signatures into our discussion . To create an immutable Ledger – a trust less system we use digital signatures.
If you compare with a normal handwritten signature digital signatures are more powerful and secure as it contains two main components = Private key and Pubic key
We will not dig deep in understanding how the digital signatures works in back end, but you need to understand that for any particular message when it combines with a secret key it creates a digital signature which is unique and very hard to counterfeit. And to verify a transaction you need Message, Signature, public key and if the result comes to True, we can say that the transaction is legitimate.
You can learn and experiment to create an encrypted SHA256 hash here , It is the same hash function which is used in Bitcoin encryption
Now to combine this we can say that now we have a ledger which is encrypted by digital signature which makes it immutable. So bitcoin is nothing but just a record of all the transactions happening which are stored and added to the chain with consensus creating a block-chain. In order to achieve a trust less system each person who is a part of the bitcoin ledger keeps a copy of it and when ever a new transaction broadcasts and who ever shows the proof of work by putting the max computational power gets to verify the transaction and in lieu of putting that much effort he gets bitcoin as a reward
Some Key takeaways
- Transactions are grouped to create blocks
- Transactions are signed digitally
- To get the block verified we have to show the proof of work ( inputting max computation power to guess the right number so that it matches with hash )
- Each block is then chained with the hash of previous block
- Which is why we say that its no just ledger of transactions its a block chain
Think of possibilities to use this technology. All tech giants are already exploring Blockchain.
Here is video explaining how block chain actually works Blockchain explained .
I will be writing and exploring more about this tech till then stay safe and keep learning .