The Ultimate Bitcoin and Blockchain basics you must know right now
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What is a blockchain?
In its simplest form, blockchain can be defined as a digital database for storing transactions and other types of data. "Blocks" of data are saved in this database in a chronological order (just as a Linked List if you have programmed before). These blocks are linked to each other by a "chain" (a block connected to its previous block of data). Unlike traditional databases, which rely on a third party or middleman, blockchain is entirely decentralized. So, no third parties can monitor or tamper with transactions done on any Blockchain as a result of this. The blockchain system is fundamentally self-regulating, thanks to a peer-to-peer (P2P) collection of computers that validate all new data and distribute copies of the database to ensure its security.
What is the difference between "Distributed Ledger Technology" & "Blockchain Technology"?
Distributed Ledger Technology (DLT) is like a database that is shared across many nodes. A single point of failure can arise anytime in a centralized database. On the other hand, a DLT is distributed and does not involve any central authority or middleman to execute, approve, or authenticate any operations.
Blockchain is like a subset of decentralized ledger, in which the data is organized into blocks. Each block is intricately bound to the one before it, making it impossible to break the block-chain.
Why is there a need of having a decentralized system?
Decentralized networks don't have a single point of failure, therefore they can keep running even if a master node is attacked or shut down. Furthermore, decentralized networks are easy to scale as we can simply add additional devices to the network to increase the computing power, and network maintenance seldom necessitates a complete network shutdown.
What is a Bitcoin?
Bitcoin was the first crypto currency to be created using Blockchain Technology. It was created in 2009 by a person known by the pseudonym, Satoshi Nakamoto. Bitcoin was designed to be used as an electronic peer-to-peer payment system.
What is a cryptocurrency and how it is different from a fiat currency?
The money that is backed by a central government is known as fiat currency. It could be in the form of physical money. Its supply is regulated by the government. On the other hand, Cryptocurrency is decentralized, meaning it is not backed by a central government or bank. The number of coins available is controlled by an algorithm.
Why is there a need of having a new currency system?
Fiat money can be printed infinitely by governments, leading to inflation. As a matter of fact, more than 80% of the US Dollars in circulation have been produced in the last 2 years alone. Transferring fiat money takes a significant period of time, especially if you’re trying to make an international transfer, it could take anywhere from 3 days to 2 weeks 😴. You will also be incurring an extra fee on top of it for doing a cross-border transaction. Transactions done on a blockchain are mostly settled in under 10 minutes and the fees are incomparable to any centralized bank.
Why do people trust Bitcoin?
Bitcoin by itself is just a large chunk of code that is open-sourced, so anyone can see what the internal code is doing and verifying its authenticity. Thus, bitcoin is 100% trustless not requiring any 3rd party. All the transactions ever happened are recorded in the public database (blockchain) and anyone can look for, given a transaction hash all the details from it like the sender's and receiver's address and the time it had happened.
What is a bitcoin network?
Bitcoin network refers to the collection of nodes that run the Bitcoin Blockchain. A node is just like a server in centralized computing. In Bitcoin network there are millions of nodes, so even if hundreds of servers (nodes) go offline it practically doesn't even matter to the network.
What is mining?
It is a process of creating new coins by solving cryptographic hash functions. All nodes in the network race against each other to find the solution to the function. Those that are the first to do so are rewarded with a fraction of the transaction fee as an incentive for their work. Thus, each successful transaction results in the creation of new coins.
What are the limitations of the Bitcoin network?
It normally takes 10 to 15 minutes for a bitcoin transaction to be reflected on the blockchain. Throughput is just about seven transactions per second.
What is a Lightning Network?
Lightning Network is a second-layer used on top of Bitcoin Network that uses micro-payment channels to make the network scalable, so as to execute transactions more efficiently. Transactions made on the Lightning Network are faster, cheaper and easier to verify than transactions made directly on the Bitcoin blockchain.
What is the Taproot upgrade?
The Taproot upgrade batches a couple of signatures and transactions into a single transaction. On the previous bitcoin network, each digital signature was confirmed against a public key, thus transaction confirmation was extremely slow. The Taproot upgrade combines the single-sig and multi-sig transactions right into a unified verification process, thus allowing the network to handle a larger throughput.