Blockchain
The bitcoin blockchain is a public ledger that records bitcoin transactions. It is implemented as a chain of blocks, each block containing a hash of the previous block up to the genesis block in the chain. A network of communicating nodes running bitcoin software maintains the blockchain. Transactions of the form payer X sends Y bitcoins to payee Z are broadcast to this network using readily available software applications.
Network
nodes can validate transactions, add them to their copy of the ledger, and then
broadcast these ledger additions to other nodes. To achieve independent
verification of the chain of ownership each network node stores its own copy of
the blockchain. At varying intervals of time averaging to every 10
minutes, a new group of accepted transactions, called a block, is created,
added to the blockchain, and quickly published to all nodes, without requiring
central oversight. This allows bitcoin software to determine when a particular
bitcoin was spent, which is needed to prevent double-spending. A
conventional ledger records the transfers of actual bills or promissory
notes that exist apart from it, but the blockchain is the only place that
bitcoins can be said to exist in the form of unspent outputs of transactions.
Individual
blocks, public addresses and transactions within blocks can be examined using a
blockchain explorer.
1.3 Transactions
Transactions
are defined using a Forth-like scripting language. Transactions
consist of one or more inputs and one or more outputs.
When a user sends bitcoins, the user designates each address and the amount of
bitcoin being sent to that address in an output. To prevent double spending,
each input must refer to a previous unspent output in the blockchain. The
use of multiple inputs corresponds to the use of multiple coins in a cash
transaction. Since transactions can have multiple outputs, users can send
bitcoins to multiple recipients in one transaction. As in a cash transaction,
the sum of inputs (coins used to pay) can exceed the intended sum of payments.
In such a case, an additional output is used, returning the change back to the
payer. Any input satoshis not accounted for in the
transaction outputs become the transaction fee.
Though
transaction fees are optional, miners can choose which transactions to process
and prioritize those that pay higher fees. Miners may choose transactions
based on the fee paid relative to their storage size, not the absolute amount
of money paid as a fee. These fees are generally measured in satoshis
per byte (sat/b). The size of transactions is dependent on the number of
inputs used to create the transaction, and the number of outputs.
The blocks
in the blockchain were originally limited to 32 megabytes in
size. The block size limit of one megabyte was introduced by Satoshi Nakamoto
in 2010. Eventually the block size limit of one megabyte created problems for transaction
processing, such as increasing transaction fees and delayed processing of
transactions. Andreas Antonopoulos has
stated Lightning Network is a potential scaling
solution and referred to lightning as a second-layer routing network.
Ownership
In the
blockchain, bitcoins are registered to bitcoin addresses. Creating a bitcoin
address requires nothing more than picking a random valid private key and
computing the corresponding bitcoin address. This computation can be done in a
split second. But the reverse, computing the private key of a given bitcoin
address, is practically unfeasible. Users can tell others or
make public a bitcoin address without compromising its corresponding private
key. Moreover, the number of valid private keys is so vast that it is extremely
unlikely someone will compute a key-pair that is already in use and has funds.
The vast number of valid private keys makes it unfeasible that brute force
could be used to compromise a private key. To be able to spend their bitcoins,
the owner must know the corresponding private key and digitally
sign the transaction. The network verifies the signature using
the public key; the private key is never revealed.
If the
private key is lost, the bitcoin
network will not recognize any other evidence of ownership; the coins
are then unusable, and effectively lost. For example, in 2013 one user claimed
to have lost 7,500 bitcoins, worth $7.5 million at the time, when he
accidentally discarded a hard drive containing his private key. About 20%
of all bitcoins are believed to be lost -they would have had a market value of
about $20 billion at July 2018 prices.
To ensure
the security of bitcoins, the private key must be kept secret. If the
private key is revealed to a third party, e.g. through a data breach, the third party can use it to steal any associated bitcoins. As of
December 2017, around 980,000 bitcoins have been stolen from cryptocurrency exchanges.
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