Bitcoin is a crypto-currency (a kind of digital currency), mainly created to simplify a transaction without having third-party intermediaries. It all started when this mysterious man under the name of Satoshi Nakamoto (whose actual identity is still unknown) published a white-paper named Bitcoin: A Peer-to-Peer Electronic Cash System in 2009. A Satoshi is the smallest unit of Bitcoin. A unit of Satoshi is equal to 0.00000001 bitcoin!
The most interesting part here is that these Bitcoins are not issued by any centralised banks or authorities. They are ‘mined’ by a group of people called as ‘miners’. They solve complex mathematical problems/puzzles and are issued a certain number of Bitcoins in exchange.
Blockchain is a data structure or ledger that stores information about any transactions that occurs(not just bitcoin). Anything that is stored once can’t be changed or modified. This feature of Blockchain makes it the most secure. It is decentralized and establishes a peer to peer network thus eliminating any middle-men.
Blockchain is made up of blocks that are stored in a chronological order. Each block has a capacity of around 500 transactions on an average. Thanks to the cryptography involved, these blocks are extremely secure. Each block will a unique ‘hash’ value attached to it which is calculated based on the data stored in the block. Every-time a new block is added to the chain, the new block contains the hash of the previous block as well. So modifying the contents of any previous block is practically impossible(and would destroy the whole chain). This makes Block-chain immutable.
Some Jargons involved-
- Blockchain is immutable: It means once data has been written to a blockchain no one, not even a system administrator, can change it. The blockchain can be changed in append only fashion. In other words, transactions can only be added to the blockchain. Modifications and deletions are not allowed.
- Blockchain is decentralized : It means that it doesn’t rely on a central point of control. Everything is spread over. Thos makes the system fair and secure.
- Smart Contracts : These are a set of protocols or more like a computer program that are stored in a blockchain and are executed when certain conditions are met.
- Consensus protocols : These are a set of protocols that keep all the nodes in the network synchronised with each other. It prevents any single entity from controlling the whole blockchain system. The aim of consensus protocols is to guarantee a single chain is used and followed.
- Hashing : It is process in which the data stored in a block is converted into a fixed length output through a mathematical algorithm (eg SHA-256 is used by Bitcoin). The value of hash is unique for the same data and it is impossible to produce the same hash using different pieces of data.
- Wallet : A Bitcoin wallet is like a physical wallet. It contains your private key which can be used by you to store/spend Bitcoins on the Blockchain.
- Private key : It is similar to the passwords we use to initiate a transaction. Likewise, using these private keys we can spend Bitcoins from our wallets using a cryptographic signature.