Blockchain: How the Technology Underlying Bitcoin Works

According to the data Coinmarketrate.com, in October 2008, under the sign of the financial crisis and declining confidence in banking institutions, a certain Satoshi Nakamoto introduced the Bitcoin cryptocurrency. It was supposed to be independent of central banks, and also solve the problems of early digital currencies. For example, the fact that the coin is issued in limited quantities. And this is where blockchain comes into play.

Bitcoin payment transactions should be distributed across networks: a number of transactions are combined into data blocks and verified by network participants using complex computational procedures. Each block contains encrypted information about the previous block and a timestamp. In addition, the entire resulting chain of interdependent blocks is stored on all computers connected to the network. Hence the name “blockchain” for this technology.

Obviously, the information stored in this way is largely protected from subsequent changes. This is because changes to a block that has already been saved will invalidate the encrypted link in a subsequent block. For successful manipulation, it is necessary that all subsequent blocks on all nodes of the network are also changed, which is extremely time-consuming and therefore unlikely.

Blockchain is a technology for secure processing and verification of data transactions based on a distributed peer-to-peer network. Blockchain is part of the distributed ledger technology family. It uses cryptographic processes, consensus algorithms, and feedback blocks to make transactions virtually immutable.

The first transaction with Bitcoin occurred on January 3, 2009, when the first block was “broken” – it generated 50 Bitcoin for Nakamoto. New Bitcoins are “mined” by checking a new block in the chain. The computing power required for this is high and changes regularly; the number of coins mined in this way is also regularly reviewed.

Blockchain and Cryptocurrency – Development Tools

Since blockchain is relatively protected from manipulation, it is considered a proven and proven tool for development assistance projects. “In countries with weak legal infrastructure, such technology as blockchain can be used, for example, to establish land rights or payments in the context of development assistance projects in a transparent and tamper-proof way. Blockchain can make possible some useful applications in the next few years, especially in such conditions,” explains Christiane Weiland, who has a doctorate in economics and business administration, who is the head of the dual study program in business administration and banking at the University of Applied Sciences Baden-Württemberg Karlsruhe.

There are certain peculiarities in the use of blockchain in the context of development assistance, says Weiland: “Usually it will not be an ideal type of completely open and anonymous blockchain, rather interaction will occur through a closed circle of users who do not have anonymity at the moment.”

It is important that all participants really want to have such a tamper-proof design, he said. “If there are interested parties in the system who want to remain corrupt, then they will not perform evidence-based work. And then nothing will work out”.

A curious detail: who is behind the pseudonym of Sakoshi Nakamoto is still unknown. His Bitcoin account reportedly holds over 1 million Bitcoins, which were probably created quite soon after the currency’s launch. With the increasing popularity of Bitcoin in shadow circles and on the darknet, Nakamoto eventually exited the network.

From cryptocurrencies to smart contracts

With the advent of other blockchains, such as Etherum or Hyperledger, the technology has also moved beyond the open source scene: now it’s not just about the secure decentralized transfer of values. Digital contracts (smart contracts) have also become possible thanks to integration into blocks of algorithms that trigger actions instead of currency units. This has expanded the potential applications of blockchain: from the automation of public administrative processes, the conclusion of contracts to the management of certificates in the trade of goods.

A striking example of blockchain development is the Decimal Chain (DEL) project, created on the DPoS algorithm. This project not only allows you to talk about liquid profitability, but also gives you the opportunity to interact with other blockchains using cross-chain bridges, but also to issue your own tokens, including NFT – non-interchangeable tokens.

At the same time, Bitcoin has experienced ups and downs, as well as the growth of criticism. The mining process – checking new blocks and re-mining Bitcoins, requires more and more energy due to complex algorithms. According to the Cambridge Bitcoin Electricity Consumption Index, it was about 120 TWh per year, which is approximately equal to electricity consumption in the United Arab Emirates or Norway. Now the situation is radically changing, as Bitcoin is becoming more and more “green”, using renewable energy.

Classic cryptocurrencies, which are based on a decentralized mining system, have become very commercialized. This is no longer a private cryptocurrency enthusiast who mines Bitcoins on a computer in his basement. Everything has become too expensive and too complicated for that.

This leads to structural problems. Commercial Bitcoin mining takes place in regions with low electricity costs, such as Iran or the United States. These electricity costs do not include actual costs, including CO2 emissions. From an economic point of view, this leads to an incorrect allocation of resources.

So Bitcoin mining requires regulation of energy consumption.

In addition to energy consumption, there has been and continues to be other criticism of blockchain technology. There has already been a colossal number of thefts of cryptocurrencies. Because, no matter how the blockchain principle is protected from manipulations with blocks after they are written, gaps in the security of the software with which, for example, Bitcoins are managed or access to the blockchain is carried out can be problematic.

Central Banks’ Digital Currencies: Will Cash be abolished?

Progressive representatives, in particular, have long considered cash a relic of a bygone era. Cash facilitates corruption and terrorist financing, but, on the other hand, it also has obvious advantages.

Expert Christiana Weiland adheres to a differentiated point of view: “Let’s take the digital euro as an example. The possible advantages are obvious: mass payment transactions can be processed more efficiently both at the national and international level, completely new areas of application are emerging – especially in combination with IoT. Money laundering or terrorist financing, for example, can also be difficult. But on the other hand, people also want anonymity when it comes to payment transactions.”1

So is anonymity in payment transactions impossible with a digital euro? Yes, it is, says Weyland: “One of the solutions for limited anonymity could be a kind of digital ATM for digital euros: then we could simply withdraw money anonymously up to a certain limited amount, and no one would know what we are spending money on. Another possibility may be a loan on a kind of prepaid card, but with a limited amount of data storage.” But all this is just speculation.

The abolition of fiat will mean the abolition of freedom.

Conclusion

As experience has accumulated, many blockchain models have emerged, differing from each other in various details. For example, there are blockchains that only closed, precisely defined groups of users have access to. Meanwhile, there are other, less complex verification procedures that successfully solve the energy problem of the progenitor of Bitcoin – depending on the trust of users.

The technology is developing, and at the moment it is only at the beginning of its journey.