Tags: Bitcoin, Investing, Technical, Transactions
Bitcoin 101: Technical Aspects of Transactions
31 Aug, 2020 with a few updates from September, 2022
You’ve heard places like Wyoming and Fort Worth, Texas, Miami, recently California and more have governments in place who are declaring themselves blockchain hubs and helping to spur innovation.
Technically speaking, Bitcoin can be construed as software. Bitcoin is visually advertised as the stock image of shiny coins along with modified Thai baht symbols.
Before the advent of Bitcoin, many financial and technical experts were pursuing their efforts to create a virtual currency unleashing the potential of cryptography.
As Bitcoin managed to gain substantial industry acclaim, many scammers tried to imitate it. Despite their mall intentions Bitcoin still remains the leading cryptocurrency in terms of investing and market capitalization.
What sets Bitcoin apart from other cryptocurrencies is its underlying technology and decade-old history. To stay current on where technology as a whole is heading; and already has, you should take a moment to understand the blockchain network as a whole.
An underlying Blockchain protocol empowers Bitcoin. Bitcoin was originally put forth by an anonymous person Satoshi Nakamoto, but most are unaware of Santosh’s real identity.
Since then, Bitcoin has managed to grab substantial market traction and numerous Blockchain networks have been created and deployed in different fields leveraging the power of cryptographic hash function algorithms. Blockchain is very closely related to Bitcoin besides, it is the underlying technology behind all the cryptocurrencies particularly Ethereum. What many don’t realize is all the applications that are powered by the blockchain as well.
The versatility of Blockchain technology has grabbed the attention of many technology aficionados, government, and large enterprises. Many experts think technology lays down the foundation of the new era of fintech to make the world less reliant on third-party intermediaries or governing bodies.
Blockchain technology and distributive ledgers are often used interchangeably. Bitcoin’s Blockchain is distributed therefore it is publicly available to all the participants of the network. There is no governing body responsible for validating Bitcoin transactions, so the participants of the Bitcoin network do the job of verifying each block of transaction.
Case Study #1:
*Prior to web 3.0, if you wanted to build an application you essentially had to pay Amazon Web Services or Microsoft Azure. As someone with extensive experience advising technology companies, I can tell you these costs are huge for a new company.
Most tech companies spend $10,000 a month right off the bat to launch their technology.
Blockchain has made it possible for the barriers of entry to crumble down.
Here’s another case study pertaining to food and agriculture, which we all depend on:
Case Study #2
The food industry has seen countless outbreaks of e Coli, salmonella, listeria, as well as hazardous materials being accidentally introduced to foods. In the past, it has taken weeks to find the source of these outbreaks or the cause of sickness from what people are eating. Using blockchain gives brands the ability to track a food product’s route from its origin, through each stop it makes, and finally its delivery. If a food is found to be contaminated then it can be traced all the way back through each stop to its origin.
Not only that, but these companies can also now see everything else it may have come in contact with, allowing the identification of the problem to occur far sooner, potentially saving lives. This is one example of blockchains in practice, but there are many other forms of blockchain implementation.
*IBM has helped in creating its Food Trust blockchain to trace the journey that food products take to get to its locations.
Blockchain Technical Aspects
The working methodology of Blockchain is pretty straightforward. A Blockchain is a chain of blocks wherein each subsequent block is linked to the preceding blocks by a cryptographic hash value.
Strings of 0s and 1s are what comprise the information stored in the Blockchain therefore, we can store emails, contracts, land titles, marriage certificates, and plenty of other things in the Blockchain network. Already many of your most secure apparatus online is being stored in the network. It is cloked under other names however. In terms of security, nothing is more secure. Hence why the upgrading of the entire infrastructure of the internet is dependent on blockchain technology.
Technically speaking, any contract between two peers can be easily stored in the Blockchain database as long as both parties express their satisfaction over the contract. Thereby, Blockchain eliminates the need for any intermediary in the contract.
In a Blockchain-driven cryptocurrency Bitcoin, the information stored in it is mostly related to the transactions.
To keep that in perspective, let’s take a technical example, let’s suppose Bob sends X Bitcoins to an Alice, and Alice sends Y Bitcoin to Akash. By combining all these transactions, anyone can get the complete detail of all the transactions. It is pertinent to know that it is not mandatory that both the sender and a recipient are human.
To keep that in perspective, let’s suppose 15N3yGu3UFHeyUNdzQ5sS3aRFRzu5Ae7EZ intent to send 0.01718427 BTC to 1JHG2qjdk5Khiq7X5xQrr1wfigepJEK3t on September 10, 2020, between 6:20 AM to 6:40 AM.
Addresses of senders and recipients comprise a long string of letters and numerals. If you are a law enforcement person or a well-informed person, you could easily trace out the identity of a sender and a recipient.
It is a relatively common misconception that transactions through Bitcoin are undetectable. But taking certain precautions actually means that while the individual is protected, each transaction can be traced.
Future of Blockchain Technology
Blockchain plays a significant role in today’s digital realm. Many fintech startups get motivated by it. Besides, many large-scale organizations start harnessing the true potential of this technology.
For instance, Microsoft and IBM are working on blockchain-driven projects. Walmart, the world’s largest retail store is currently working on a Blockchain-driven project to cope with food insecurity. (They have since implemented it as have many of the blue-chip companies.) There are even college degrees now in blockchain and cryptocurrency.
Anyone can unleash the potential of Bitcoin and its network to send and receive transactions irrespective of geographical location, ethnicity, gender, or political ideology. Therefore, it creates a whole lot of opportunities for internet-enabled smart devices and people globally.
In the future we can expect systems where self-driving cars have their own Blockchain wallets. The car would remain stationary until the user sends crypto funds to the car’s crypto wallet. Additionally, the vehicle will be able to assess when refueling is required; and you’ll be able to pay with crypto wallets. You can expand your investment portfolio with Boracchia Wiviott Wealth Partners or keep reading to learn more!
The technical process that is responsible for this whole environment is mining. Miners strengthen the Bitcoin network, they keep the complete track record of all transactions and store it in a separate Blockchain network.
Recording transactions is a trivial job for the modern computer, also known as the mine. But mining is highly resource-intensive that’s why an ordinary computer is not feasible for this task. If there isn’t an adequate level of power in the mining process, it simply doesn’t work.
Contrary to what some may want you to think, you can not easily spoof transactions with bitcoin or steal other peoples’ hard-earned cryptocurrencies. This is a powerful advantage of cryptocurrencies unlike banks. The miners actually don’t have access to individual wallets.
A financial institution may want you to think it’s easy to hack transactions in the Bitcoin network, but actually that’s the banks not the financial institutions.
In reality, bitcoin is much safer than your money in the banks because you can’t go into the server and spoof it.
Creating the most secure network with other cryptographic currency algorithms is the greatest financial and technological achievement possibly in the world.
In order to run a successful mining ring, you need to spend a good amount of money on the application-specific integrated circuits and plan for proper energy consumption costs (including but not limited to electrical bill). Miners get paid in cryptocurrency of their choice for the time and money they’ve spent on mining.
Miners are incentivized for their time and money. Halving is the process in which the miner’s reward is reduced by one-half after every 210,000 blocks or after every four years.
Once all the Bitcoin is successfully mined and all the halving vanishes, miners will remain incentivized by the fees from the network participants. There is a great chance of healthy competition in an upcoming future that would be an impetus for more ways to grow in cryptocurrency.
Keys and Wallets
After investing in Bitcoin, you need to securely store it. So that you’ll protect your coins from nefarious acts. This is where keys and wallets come into the picture.
Generally, Bitcoin ownership nails down to two series of numbers: a public key and the private key. The public key is a user name and password is the private key. A hash of the public key (known as the address of the participant) is displayed on the Blockchain network. Hash strengthens the security of Bitcoin.
To send Bitcoin, you just need to know the recipient’s address. The public key is extrapolated from the private key which you need to send Bitcoins to an intended recipient. Bitcoin is highly feasible for cross-border remittance transfer but it needs verification of identities to send it. Verification is as scrutinizing if not more than the most regulated US bank.
To receive BTC, you need a wallet to store it and to make it less vulnerable to malicious activities. They usually come to its different forms, such as third-party web application or QR code printed on a piece of paper.
There are two kinds of wallets: hot and cold wallets. Cold wallets are not connected to the internet whereas hot wallets are. Generally cold wallets are more secure but not all cryptocurrencies support them.
Over the last 11 years, Bitcoin has totally disrupted the world’s economy and many payment processing systems. There are more transactions through Bitcoin than PayPal nowadays.
Update for 2022: There are now publicly traded funds with bitcoin and these can be tailored to be included in your investment plan, if you elect. Just like all technology, while reaching mass adoption it will be highly correlated to the volatility of the NASDAQ; and many don’t quite understand this. Call or text Boracchia Wiviott Wealth Partners for your complimentary consultation to see how best we can serve you: (424) 625 – 8943