Bitcoin 102 (101 part 2): the blockchain

Monday 06 June 2016

In the first of our 101 series, we looked at how bitcoin was like the internet version of physical cash. Only different. Here’s how.

If I hand you a $10 bill, that’s a direct transaction. Just you and me. If I send $10 to your bank account, that’s not direct any more: I’m actually instructing the bank to deduct $10 from my balance and add it to yours. The bank can agree, refuse, charge me/you in various ways, delay for 3 working days… but that’s the way we do things, because we need that central authority to act as a bookkeeper.

In the first bitcoin 101 article, we looked at how bitcoin avoids the need for a central authority to keep accounts for us and enables me to send you $10 over the internet - once again, just me and you, with no middleman. Everything good, bad, controversial, groundbreaking, threatening or exciting about bitcoin comes down to that one property. It’s a lot like handing over cash again, just online.


Unlike a bank, in which everyone connects to a central authority, bitcoin is more like a social network, where everyone connects to lots of other members of the network

Only... different

That means bitcoin shares a lot of characteristics with physical cash. It’s direct (just you and me, no middleman). Transactions are irreversible: once you give money to someone, you can’t get it back by appealing to your trusted intermediary (because there isn’t one). Used carefully, bitcoin can also be anonymous, just like cash.

But bitcoin works on a very, very different principle. In this respect, it’s nothing like cash at all.

The problem comes in the nature of digital information. Sending someone money is not the same as sending them a file by email. Digital files can easily be copied, making that a completely unsuitable way of transferring funds.

The blockchain

Instead of sending people money, like you’d send mail or even a digital file, bitcoin is a ledger of accounts. When you ‘send’ bitcoin, you’re updating the ledger, deducting a sum from your address and crediting it to another. This is more like the bank’s approach - except that there isn’t a bank. There is no single authority to keep accounts, because everyone does it.

In bitcoin, every active member of the network holds a set of accounts. Instead of doing everything in secret, like the bank, everything is public. That means if someone tries to cheat the system by trying to send money they don’t really have, everyone else will know about it and won’t record that transaction.

The shared ledger is known as the blockchain, and miners - the ones who ensure that no one gets away with fraud - keep a full copy of it on their computers. It’s currently over 70 GB in size and growing fast, which means that it’s not easy for ordinary users to store. But you don’t need a copy of the blockchain to send and receive bitcoins. The network is public and you can submit transactions from any online computer.


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