Blockchain technology is at the centre of what makes the entire cryptocurrency system function, including, of course, bitcoin.
As the name suggests, a blockchain is essentially a chain of blocks that contain transactions and other data.
In the case of bitcoin, this data is an encrypted form of digital currency.
However, the blocks contain more than just the transactions themselves.
Besides the transactions (i.e. the amount for transfer), the blocks also contain the following information:
- A timestamp indicating when the block was created
- A digital signature that is unique to its contents
- A code that links it to the previous block.
To get more detailed, the block header – which is the key identifier of any given block within the blockchain – contains even more data.
This includes, but is not limited to, the version of the blockchain, an encrypted summary of transactions, and a number that correctly calculates the digital signature of the block header.
Once a block is included in the blockchain, it becomes permanent and irreversible.
Looked at in its entirety, a blockchain consists of every transaction that occurred since the beginning of bitcoin, starting with the very first block known as Genesis.
Is it accepted by Financial Institutions?
Financial Institutions, in the context of Bitcoin, are the conventional or traditional entities or companies that deal with monetary transactions within the overall sphere of financial services.
Banks, for example, are the most readily recognisable and referred-to financial institutions.
They store clients’ financial data and records, apply their own fees for various transactions, and generally act as the middle man (or “trusted third party”) between a buyer and a seller or, indeed, any two parties (whether individual or group) who enter into some form of financial agreement between each other.
After the 2008 financial crisis, terms like “bail-in” and “bailout” became popular and threw a very negative light on all standard and regulated financial institutions, especially banks.
A popular investment bank famously collapsed in September 2008, prompting a massive banking crisis.
With the enactment of the Emergency Economic Stabilization Act of 2008, it has been reported that the US government supplied up to $700 billion to banks in order to bail them out of the crisis.
Nakamoto developed bitcoin as an “antidote” to this loss of collective trust in financial institutions.
Blockchain prohibits double spending
Even though a form of P2P technology has been available since the 1960s, it has proven very difficult for an independent online payment system such as bitcoin to appear.
The reason for this can be summed up in two words: double spending.
The best way to explain what double spending is to imagine a bitcoin transaction as a text file: Imagine that each text file represents €10.
A customer only has €10 to his name and needs to buy a product online that is worth €20.
If he takes the text file, and copies it 10 times, all of a sudden he has €100.
If the customer buys 5 products with these €100, he would be double spending.
In the bitcoin world, if someone were to copy a digital file that represents €10, and send €10 to two different merchants at the same time, this would be an act of double spending.
Nakamoto figured out a workaround for double spending, by registering each bitcoin in a public ledger (i.e. the blockchain) and ensuring that once a bitcoin is spent, it would be marked as spent, and would not be usable for more spending.