The “Bitcoin network” is what powers the whole Bitcoin transactions mechanism.
Whilst many people will allude to “blockchain” as being the underlying infrastructure layer that allows “Bitcoin” to operate, what most people don’t know is that in order for the blockchain to work, it requires “nodes” (compute engines) to calculate new “blocks” on each chain.
This article is going to explain exactly how these “nodes” work together to form a piece of essential functionality that underlies the Bitcoin infrastructure — the ability to process transactions.
If you’re reading this from an investment perspective, it must be stated that this is NOT financial or legal advice. It is a set of opinions and explanations designed for EDUCATIONAL and informative purposes only. If you have questions regarding the validity of “investing” into any of the current cryptocurrencies, it’s strongly recommended you should seek the support of an accredited financial professional.
How Bitcoin Works…
In order to discern the “value” of Bitcoin, you need to appreciate how it works.
What most people don’t know is that at the heart of the “Bitcoin” bubble is actually a network of CPU’s and GPU’s working around the clock to create new “blocks” for the Bitcoin blockchain database.
These processors are called “miners” and work by using the various “crypto” algorithms to encrypt new “data” (transactions) and then compile them into new “blocks” on the chain.
Related Topic: Bitcoin Mining: Important things to know about
Whenever a new “block” is created, the “miner” is rewarded with several Bitcoins. This is why many people have been somewhat interested in the way you’re able to “mine” the various crypto currencies, although the difficulty in the mining process has become so pronounced that it’s not really “profitable” to do it anymore.
To give a brief definition of how this works, you must be aware that Bitcoin is built on top of the blockchain database infrastructure.
Blockchain was created in 2008 as an open source technology to enable decentralized databases to be used & adopted into the wider scheme of the Internet. The premise was that – in a similar way to the “torrent” file sharing system – Blockchain would enable a data structure with no central regulatory body able to manage it. This would not only give better data integrity, but also allow for decentralized applications to be built on top of it.
Indeed, all of the cryptocurrencies are just encryption algorithms for decentralized applications which have been built on top of the “blockchain” infrastructure.
They basically store a particular type of data (in Bitcoin’s case a “public ledger of financial transactions”), and then allow anyone in the world to “add” to the ledger (through the blockchain protocol).
Each database in blockchain is called a “chain” and whenever you add, edit or update data in each “chain”, you’re adding what’s known as a “block”. Each block allows you to specify any changed or updated data, which all has to be ratified by all the “nodes” (servers) in each blockchain “network”.
Because crypto (cryptographic) currencies are just encrypted versions of blockchain networks, the secret to their success lies in how they’re able to be accessed. This is where each “coin” comes from – they are a decryption “token” required to gain access to a particular set of “blockchain” infrastructure. These “coins” have been mistaken for real currency (they are not) and as such, it’s vital that you’re able to understand how they work properly…
The Bitcoin ‘Network’
What lies at the core of “bitcoin” is a vast network of “miners” who basically keep the ‘public ledger’ of Bitcoin as up to date as possible.
However, there’s a problem.
Because “blockchain” is decentralized (meaning it works on 100’s or even 1000’s of systems with each system synchronizing with the others), it can take days for a new “block” on its chain to just be created but also ratified with the other nodes in the network.
In other words, one of the great advantages of the system (its decentralized nature) is one of the biggest pitfalls, with MANY financial experts touting its “processing times” as being a MAJOR hurdle to the success & adoption of the infrastructure.
What’s worse – simply adding more computing power to the “network” won’t work either, because the whole way in which Bitcoin was designed to work (remember, it’s just an encryption algorithm which encodes the open “blockchain” database) is that ONLY 21 million “coins” (decryption tokens) would be EVER be made available.
This means that not only will the processing times for new “transactions” take a lot longer (as the algorithm has to validate each update with 1000’s of others running at once), but the physical LIMIT on the number of tokens that will EVER be made available has basically acted as a natural speed limiter, preventing the decrypting of more coins more quickly.
In a nutshell, the “network” of Bitcoin is HUGE (just look up “bitcoin mining” online) but the efficiency of the “core” technology has become insufferable. In fact, a “hard fork” (complete rewrite of part of the algorithm) was going to be introduced in Nov 2017 in an attempt to try and resolve the issues surrounding the processing times for each coin. This was never pursued, but shows some of the cracks appearing in the technology behind the bubble.
Is it Trustworthy?
Out of all of this, you may end up with questions regarding the trustworthiness of the bitcoin network. If this is the case, there are several points which need to be made.
Firstly, Bitcoin is NOT a currency. It’s a financial ledger (an itemized list of transactions… much like a telephone bill). This ledger allows you to not only determine who transferred money to who, but allows you to ratify these transactions with different equivalent fiscal values (in other words, you’re able to trade different currencies with people).
The mistake MANY people have made is confusing “Bitcoin” (which is just an encryption algorithm) with an ACTUAL coin. Bitcoin is NOT a coin/currency because it’s not backed by any real world assets. The reason why the USD, GBP or EUR has value is because each of those currencies are backed by REAL assets in the form of revenue-producing companies, raw materials, tradeable commodities and military power. Bitcoin has none of these.
As such, the idea that a “bitcoin” is worth anything is false.
The “value” that Bitcoin provides is the ability to trade more openly with more people. Without the need of a central payment processor, you’re able to transact with different people regardless of where they are in the world.
The underpin of this “trading” capacity lies with the Bitcoin network. If you have this network set up correctly and securely, there is no reason why it cannot be trustworthy at all.