Bitcoin’s Trifecta: Blockchain + P2P Network + Cryptography = Revolution
In 2008, an anonymous individual or group of people under the pseudonym Satoshi Nakamoto published a document that provided a detailed technical description of a decentralized digital currency: the Bitcoin whitepaper. While it is debated whether the financial crisis of that year, known as the “subprime” crisis, is linked to the whitepaper, Nakamoto did mention that the financial system had “failed” and that a new system was needed. And that’s what Bitcoin is all about! A new way of handling financial transactions that did not rely on centralized institutions, but instead combined three older technologies into a revolutionary trifecta: blockchain, a peer-to-peer network, and cryptography. The whitepaper is still publicly available but it can be challenging to digest… That’s where this article comes in: we will explain these three key concepts in a more accessible fashion.
The blockchain is an unalterable ledger, like a notebook where anyone can write but nobody can erase or even modify anything. In Bitcoin’s case, it is used to store every transaction ever made. Transactions are grouped into “blocks” (that’s what gets written in the ledger), and they are verified by network participants called “miners.” Once a block has been verified, it is added to the blockchain, de facto recording all Bitcoin transactions chronologically. So the blockchain is essentially a database that is maintained by thousands of computers worldwide – they all have a copy of the notebook! As we will see below, the immutability of the blockchain is guaranteed by its distributed nature and the cryptography-based verification process, which make it practically impossible for a single entity to tamper with. Every transaction on the blockchain is public, and any attempts to spend Bitcoin that has already been spent or create fake transactions would be immediately recognized and rejected by the network.
The peer-to-peer network is what makes Bitcoin decentralized. Instead of relying on a central authority to verify transactions, the network is made up of thousands of nodes, which are simply computers or devices running Bitcoin software, that communicate and work together to validate transactions. As of February 2023, there are approximately 14,000 reachable nodes on the Bitcoin network — you can see the current value online, for example on this website. This is similar to how torrents work, where files are shared between many different users rather than being stored on a single central server – ever heard of Napster? By using a peer-to-peer network, Bitcoin avoids the problems associated with centralized systems, such as the potential for corruption and censorship. The network operates according to a set of rules that are enforced by the software, like the maximum block size limit for instance, making it resistant to outside influence.
Cryptography is used in Bitcoin (check out our previous article) to secure the network and ensure that transactions are legitimate. One of the key concepts is proof-of-work, which is a cryptographic puzzle that miners must solve to add new blocks to the blockchain (that’s the verification step mentioned above). This process helps to prevent spam and other attacks on the network, and it is also the way in which the network achieves consensus. When a miner successfully solves the proof-of-work puzzle, they are rewarded with a certain amount of newly created Bitcoin as well as any transaction fees associated with the transactions in that block. Once the block is added to the blockchain, other nodes on the network can easily verify that the block is legitimate by checking the proof-of-work. In this way, miners play a crucial role in maintaining the security and integrity of the Bitcoin network. The cryptographic security of the Bitcoin network is what makes it virtually impossible to hack or tamper with, providing users with a high level of trust in their transactions… thanks to its trustless nature!
To illustrate how secure the system is, let’s imagine an attacker wanted to fake a transaction. First, they would need to gain control of 51% of the network’s computing power, which is an incredibly difficult (and expensive) task given the number of nodes on the network. Next, they would need to create a fake transaction and add it to the blockchain. However, this would require solving the cryptographic puzzle for every block that has been added to the blockchain since the target transaction occurred, which is practically impossible.
In summary, Bitcoin’s three major characteristics – blockchain, peer-to-peer network, and cryptography – work together to create a decentralized system that is secure, transparent, and resistant to outside influence. These features have made Bitcoin a popular alternative to traditional forms of money and have inspired the development of many other cryptocurrencies that use this same concept, and even sometimes expanded on it.