Reaching a record high of 11200USD+ yesterday after just reaching 10000USD the other day, Bitcoin is gaining more and more attention. Most cryptotraders, miners and enthusiasts alike will notice that more and more people are talking about Bitcoin and cryptocurrency. Whenever Bitcoin reaches a new all-time-high, a bunch of new users are pulled in by the hype and try to put in as much money as they can into Bitcoin. This sometimes results to people asking why their transactions fees in Bitcoin are way too high and why it’s taking a long time for their transaction to push through.
I gave a very brief background of what bitcoin is in one of my posts. If you haven’t read the bitcoin white paper, I highly suggest that you do. If you don’t have the time, I’ll try to simplify some of the concepts about it which we will later on need in order for us to understand why transaction fees and confirmation times are sometimes long and expensive. However, before that, we must familiarize ourselves with some basic concepts in Bitcoin and the blockchain technology.
Let’s start with a very basic concept of transaction. The wiki defines a transaction as “a transfer of Bitcoin value that is broadcast to the network and collected into blocks”. To put it simply, a buy or a sell is a transaction. Whenever you buy bitcoins from Coinbase , or sell your Bitcoins in Bittrex, those activities are all considered as transactions. You gain or lose Bitcoin and that gain or loss is then recorded in a block. A transaction also contains inputs and outputs but more on that later.
As mentioned earlier, transactions are all collected into blocks. So what is a block? A block basically is a container of transactions. This is where all transactions are permanently recorded. You can think of a block as a ledger where you note down whom you paid and who paid you. Whenever you make a transactio, it will eventually be saved in a block and later on, stored in the blockchain.
You might be hearing the term blockchain recently because of the success of Bitcoin. We already know what a transaction and what a block is. Now it’s time for us to discuss what a blockchain is. A blockchain literally is just a chain of blocks. What makes the blockchain technology great is the fact that since all transactions are recorded in a block and a block is later on added to the blockchain, all historical transactions starting from the genesis block (the very first block mined) up until the latest transaction are visible to everyone.
There are more technical aspects behind the blockchain but we won’t discuss it for now. You just need to understand that a blockchain is a collection of blocks where ALL transactions in the Bitcoin network is stored. From the first transaction of Satoshi Nakamoto to Hal Finney, the 10,000 BTC worth of pizza bought way back, up until the recent Bitcoin purchased/sold, all of them are stored in the blockchain.
I mentioned above that a blockchain is a collection of linked blocks where all our transaction are saved. However, have you thought how blocks are created and who maintains the blockchain? Nodes, most specifically minding nodes or what we commonly call Miners are responsible for all of these. All miners have a copy of the entire blockchain in their nodes. So as not to complicate things, you can think of a node as just a computer used by a miner. It’s the responsibility of the miners to secure the Bitcoin network.
They do this by constantly validating blocks added in the network and make sure that those blocks are valid. They are also responsible for creating blocks that will be added in the blockchain. Whenever there are set of transactions done in the Bitcoin network, miners compete with each other to find what is known as a hash. Currently a miner who successfully solves a block is rewarded 12.5 Bitcoins. This cycle of finding a block and adding them to the blockchain usually takes on average 10 minutes. This means there are roughly 6 blocks added to the blockchain every hour.
These terms and concepts have much more depth in them and I barely scratched the surface with what I’ve explained. It’s important to understand these concepts before proceeding to our next topic which we will discuss in my next post.