Blockchain and Bitcoin Explained

Blockchain and Bitcoin

Blockchain involves a network of nodes (computers), each maintaining their own copy of the blockchain.
There isn't one central blockchain; instead, each participant has their own, synchronized version.
Nodes agree on the state of the blockchain through consensus mechanisms.
Initially, each blockchain contains three blocks represented by different colors (red, orange, and green).
Nodes then independently try to build a fourth block.

Blocks contain transactions made between people using a cryptocurrency (e.g., Bitcoin).
Bitcoin was the first cryptocurrency to utilize blockchain technology.
When a user initiates a transaction, the request goes to the mempool, which is a pool of pending transactions.
Nodes fetch transactions from the mempool to build their blocks.
Each node builds its fourth block independently.

Each block has a unique hash, determined by its block number and the transaction data it contains.
A hash is like a fingerprint, generated by an algorithm.
Bitcoin uses the SHA-256 hashing algorithm.
Example: Inputting "Anakin Skywalker" into SHA-256 generates a unique hash.
Changing the input data results in a different hash.
The block number and transaction details are inputted into the hashing algorithm to generate the block's hash.
If any transaction detail changes, the hash will also change.

A nonce is a user-decided number that also influences the hash output.
Changing the nonce value alters the generated hash.
The block number and transaction data remain constant, but the nonce can be manipulated.
Mining is the process of searching for a nonce that results in a hash that complies with the blockchain's rules.
For example, a rule might state that a valid block hash must start with two zeros.
The mining process involves trial and error to find a nonce that produces a valid hash.
A nonce that leads to a valid hash is called a golden nonce.
In reality, the requirement is more like 18 leading zeros instead of just two.
The difficulty (number of leading zeros required) changes approximately every two weeks.
As a reward for finding the golden nonce, miners receive freshly minted Bitcoin.

The node that finds the golden nonce first announces it to the other nodes.
Other nodes verify the found nonce and the resulting hash.
If valid, they add the new block to their own chain.
The node that found the golden nonce receives newly minted Bitcoin as a reward.
Finding the nonce requires significant electricity consumption, making it an expensive endeavor.

The mining difficulty level (number of leading zeros required) changes every two weeks to ensure mining remains worthwhile.
The difficulty is adjusted based on network participation to balance the cost and reward.
If fewer people are mining due to high electricity costs, the difficulty decreases, requiring fewer leading zeros.

The hash of the previous block is included in the calculation of the current block's hash.
The first block in the chain is called the genesis block, and its previous hash is all zeros.
Each subsequent block includes the hash of the block that precedes it, forming a chain.

If a transaction in a previous block is altered, the hash of that block changes.
This invalidates the hash of the subsequent block because it contains the previous (now incorrect) hash.
To alter a transaction, one must remine the block containing the transaction and all subsequent blocks.
This requires enormous computational power.

Nodes only accept the longest valid blockchain.
If a node tries to create a fraudulent block, its chain will differ from the others.
Even if the fraudulent node successfully remines the altered block, the other nodes will reject it.
To successfully attack the blockchain, a node must remine the altered block and all subsequent blocks faster than the rest of the network combined.
This is considered practically impossible due to the computational power required and the associated costs.
The cost of electricity to perform such an attack would likely outweigh any potential reward.
These mechanisms contribute to the immutability of the blockchain.

Bitcoin was the first blockchain application.
Blockchain is the underlying technology, and Bitcoin is just one use case.
Analogy: Blockchain is like the Internet, and Bitcoin is like email.
The Bitcoin white paper, published in 2008 by Satoshi Nakamoto, introduced the concept.
The white paper doesn't use the term "blockchain;" it was termed later
Satoshi Nakamoto is an anonymous person or group who disappeared around 2011.
Wallets associated with Satoshi Nakamoto hold a significant amount of Bitcoin (approximately R1,900,000,000,000) that hasn't been spent since 2012.

The first Bitcoin block was mined in early 2009.
Blocks can be inspected using a block explorer.
Each block contains the hash, nonce, and transaction details.
The hash starts with a predetermined number of zeros (currently around 18).
The nonce is the value that, when combined with other block data, produces the required hash.
A timestamp (the second of time) is also included in the hashing algorithm, increasing the difficulty of finding a valid nonce.
Mining farms and pools:
- Due to the difficulty, people create mining farms, and mining pools
- People contribute money to mining pools; when that farm finds a nonce, the reward is distributed between the pool users.

Ways to Acquire Bitcoin:
- Buy it at an exchange:
  - Such as LUNO
- Peer-to-peer:
  - If a person already has Bitcoin, you can buy it from them
- Bitcoin ATMs
- Mining:
  - If you find a golden nonce, you get Bitcoin that way
You can store Bitcoin in two ways:
- Store your Bitcoin in an exchange such as LUNO
- Buy a hardware wallet:looks like a USB stick and you can transfer your bitcoin over to that hardware wallet
Misconception about Wallets:
- Wallets don't contain bitcoin; it's rather a historical transaction, and the blockchain contains the Bitcoin
- Wallets have a public key that enables you to control Bitcoin on the blockchain
- The key will let you send the Bitcoin to someone else on the blockchain
Exchanges store your keys on a server, but the server could be hacked, but that does not mean the Blockchain got hacked; just the exchange did.
Andreas Antonopoulos says that there are two types of exchanges, ones that have been hacked and ones that will be hacked.
If you have a large amount of Bitcoin, get yourself a hardware wallet that costs R2,000 and buy it from a supplier to make it much safer.

Decentralization: Bitcoin operates on decentralized networks, so there is no bank.
Limited Supply
Transaction fees
- The transaction fee making a Bitcoin transaction is fixed
- It's not related to how much money you're making, so it is R35 per transaction.
- If you send someone a million rand, R35 Is nothing
- It is not worth it if you are buying a cup of coffee
Payments are irreversible.