What is Bitcoin?
Bitcoins are private, super-fast, cheap(transaction fees are minimal) and entirely decentralized. The structure of a Bitcoin block header consists of –
- Reference to a previous block hash
- The difficulty, timestamp and nonce
- The Merkle root
||A version number to track software/protocol upgrades
||Previous Hash block
||It is the reference to the hash of the previous block in the Blockchain
||A binary hash of the root of this block
||Approximate time it took to create the block.
||Contains the proof-of-work algorithm.
||A counterpart of proof-of-work
Type of Bitcoin Wallets :
A “wallet” is basically the Bitcoin equivalent of a bank account. It allows you to receive bitcoins, store them, and then send them to others. Once a bitcoin wallet is installed on your computer or mobile device, it will generate your first bitcoin address. Each address has its own balance of bitcoins. There are few types of wallet such as –
- Software wallet – Bitcoin Armory
- Web wallet – Convenient than Software wallet
- Cold wallet – Not connected to the internet
- Paper wallet – USB Drive
- Brain wallet – Like a computer which makes pass phrase of random words
- Hardware wallets – More like physical wallet
Mining of Bitcoins :
Bitcoin mining is adding transactions happening in the Blockchain to bitcoin’s public ledger of past transactions. The ledger which holds the past transactions is called the Blockchains or it is a chain of blocks. The blockchain serves to confirm transactions to the rest of the network as having taken place. Bitcoin consensus algorithm allows for the creation of new Bitcoins by the process of Mining.
It involves four steps:
- Autonomous check of every transaction: Autonomous check of every transaction, by each full node, in light of an extensive rundown of criteria
In this process, Person A initiates 5BTC to B in the network. Confirmation happens, followed by valid transactions.
- Proof of Algorithm work: Independent aggregation of those transactions into new blocks by mining nodes combined with exhibited calculation through a proof-of-work algorithm
By autonomously confirming each transaction as it is received and before transmitting it, each node maintains a pool of valid (however unconfirmed) transactions known as the transaction pool, memory pool or mempool. Mining happens in this stage either by solo or group mining.
- Confirmation: Independent confirmation of the new blocks by each node and get together into a chain.
Validation of the added new block after mining.
- Independent aggregation: Independent selection, by every node, of the chain with the most cumulative computation demonstrated through proof of work
New blocks are added in Blockchains as a string of long chains.
Ethereum VM :
The Ethereum Blockchain is intended to do far more than process shared transactions. It is designed to execute complex code, where the functionality is only restricted by the imagination of its developers and accessible resources. The complex codes are executed in Ethereum Virtual Machine.
Merkle trees :
Merkle trees are also known as a binary hash tree. A data structure used for summarizing and verifying the integrity of large sets of data. It contains cryptographic hashes. It is displayed upside down with the “root” at the top and the “leave” at the bottom. It is a “light client” which can only download the chain of block headers for verifying transactions. A block of one or more new records is collected and such records are then hashed, and the hashed records are paired, hashed, paired again, and this process keeps repeating until a single hash remains. That single hash is known as the Merkle root of a Merkle tree.
Decentralized Autonomous Organizations(DAO) :
DAOs are organizations that exist entirely on a blockchain and are governed by its protocols
A unison of many long-term smart contracts between many people. DAOs are designed to hold onto assets and use a kind of voting system to manage their distribution. Two or more entities in DAO can interact with each other in a fully decentralized and automated fashion. DAOs comprise a global network of nodes and members that all work together. In the DAO, each action or vote is represented by some form of transaction in the Blockchain.
Decentralized applications or DApps are like computer applications that can operate over a blockchain, which allows direct interaction between application creators and final users. To create an applications DApps uses either a single DAO or multiple/series of DAOs working together.
Critical application of Blockchain :
Blockchain maintains a decentralized system with a universal ledger for entry of the addition of new Blockchain along with a confirmation mechanism that is used to prevent the “Double Spending”. Double spending occurs when you try to send the same Bitcoin in two different addresses. (In the real world, the same digital money is spent more than once).
51% Attack occurs when a group of miners who has > 50% of the Network Hash Rate could manipulate the network with the New transactions or able to reverse the already take placed confirmed transactions that and kind of doing Double spend. The probability of the occurrence of such an attack is very less. Running mining pools can prevent 51% attack.
Once the recommended wait of 6 confirmation is done on a transaction, it is added as a valid block in the Blockchain general ledger.
Benefits of Blockchains on Cryptocurrencies :
Removing the reliance on a trusted third party to maintain a central ledger has the following benefits :
- Settlement in real-time
- Cost Saving
- Security & Resilience
- User Pseuanonymity
Find out more about the benefits of Blockchains on Cryptocurrencies with Blockchain certification course.