The technology behind Bitcoin transactions can be a little complicated, so we’re breaking it down for you.
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Blockchain technology originated in 2008 when a man under the pseudonym of Satoshi Nakamoto created Bitcoin. Nakamoto wanted Bitcoin to be a “purely peer-to-peer version of electronic cash.” Essentially, it had to be able to change hands without accidentally being diverted into the wrong account. He also needed it to be incapable of being spent twice by the same person.

Bitcoin was first visualized as a decentralized system, meaning Nakamoto didn’t want to turn to banks to avoid such abuses. This is where blockchain technology comes into play.

What exactly is blockchain technology?

Specifically for Bitcoin, blockchain technology is a database or public log that holds the payment history of every single bitcoin in circulation; it provides proof of who owns what and when.

Blockchains arrange data in batches called blocks that use cryptographic information to link themselves together. Each block is able to identify and reference the previous block through a hashing function, which then forms a chain.

The most beneficial side to blockchain technology is that it eliminates the need for a third party to facilitate digital relationships. And while blockchain technology is incredibly innovative, it has proven to be unique as well.

Unique functions

The more unique element of blockchain technology is its ability to distribute said databases. This allows the database to exist on multiple computers at the same time, so anyone can find a copy of it. In simpler terms, blockchain technology is similar to a Google document without the privacy settings. However, blockchain technology is able to make sure that nobody tampers with your records. The old transactions are preserved forever, and new transactions are added to the database irreversibly.

Blockchain technology has become extremely popular because of its vast potential, but surprisingly, people were quite skeptical at first.

Not so skeptical anymore

Blockchain technology can sometimes be referred to as an MDL, or a mutual distributed ledger. MDLs are nothing new, but they were considered complicated and unsafe for some time.

Bitcoin’s permanence, security and distributed nature quickly allowed the public’s opinion on MDLs to change by ensuring that it was a digital currency maintained by a growing community and unable to be manipulated by anyone.

But even though blockchain technology has become extremely popular, it does have a downside.

Energy consumption and storage

Despite all the promising features surrounding blockchain technology, it does consume a lot of energy. According to Michael Mainelli, the executive chairman of financial tech think tank Z/Yen, Bitcoin consumes the energy consumption of half of Ireland. The Bitcoin blockchain miners attempt 450 thousand trillion solutions per second in order to validate transactions, and because of the distributional nature of the technology, there is a constant computational power in multiple locations.

Some people also view blockchain technology as a problem because of storage and synchronization. On average, a new block is added to the blockchain every 10 minutes, which means the blockchain is always growing.

Takeaway

Blockchain technology is becoming more popular every day, and it is transforming businesses all over the world. The third-party replacement allows users to trust that transactions will be executed properly while also giving users more control over their information and transactions. Although blockchain technology can be a little difficult to understand, it has proven to be helpful in many ways, and it will it be interesting to see how the technology develops over time.

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Header image: Getty Images

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Posted 05.19.2017 - 04:16 pm EDT