Since its invention, the popularity of Bitcoin (BTC) has been on the rise. Not only that but thanks to its state-of-the-art blockchain technology, today we get to have a wide variety of different cryptocurrencies.
All cryptocurrencies are based on this technology and operate through a consensus mechanism. The information gets encrypted and stored on the blockchain irreversibly whenever a transaction is made. The strength of the encryption depends on the number of miners on the blockchain, as they are the ones who verify and encrypt the data.
But what exactly is blockchain technology, and how does the cryptocurrency ecosystem keep getting bigger and bigger? These are some of the questions that we’ll address in our article today.
What Is Bitcoin?
Bitcoin is the first-ever cryptocurrency, invented by Satoshi Nakamoto in 2009. Harnessing blockchain technology, the Bitcoin network revolutionised how we see the future of finance and money. Bitcoin (BTC) is indeed the most well-known and popular digital coin, with the greatest price index and market capitalization among all the cryptocurrencies.
Its invention and immediate success have established a growing cryptocurrency ecosystem and have set the ground for all subsequent altcoins. Some of them copied the open-source code of Bitcoin (BTC), such as Bitcoin Cash (BCH) and Bitcoin SV (BSV), while others altered it or invented their own blockchain technology, such as Ethereum (ETH) and Cardano (ADA). Understanding blockchain technology is essential if you want to understand cryptocurrencies and their nature.
What Is a Blockchain?
Blockchain is a relatively new technology that has played an immense role in the decentralization of finance through cryptography, providing an option to do most of our transactions directly on a peer-to-peer basis without involving intermediaries like banks.
Even though blockchain networks have affected the financial markets around the world immensely, we should keep in mind that finance is not its only area of impact. Blockchain technology has applications in many other areas such as law, art, programming, etc. as it introduces tools like smart contracts, decentralized apps (dApps), or implications on patenting through NFTs and other tokens.
In the cryptocurrency ecosystem, the blockchain represents a system of declaration of ownership between the network nodes. In other words, blockchain is a chain of encrypted data that keeps the information about which wallet holds what amount of currency. This is done with the help of nodes (or miners) that continuously check and compare the copy of their blockchain along the process of validating new transactions. When you think about Bitcoin, you might be thinking that it’s just a virtual currency, coded somewhere on the internet. But in fact, the blockchain is what constitutes the digital currency that we can own and transact with.
Overall, the blockchain is a public distributed ledger that stores ownership data. Every new transaction is added to the blockchain irreversibly through new blocks. Once they are attached to it, they’re practically impossible to alter. Thus, the ownership of the wallets is kept secure.
How Does the Bitcoin Blockchain Work?
The name blockchain comes from the fact that it’s made up of blocks that are chained together. The first block, namely the Genesis block or block zero, is hardcoded into Bitcoin’s source code. The second block holds a piece of encrypted information, called a hash, which refers to the Genesis block. All the blocks in the blockchain refer to the block that precedes them so that any data tampering can be easily spotted.
Bitcoin miners use the Proof of Work (PoW) consensus mechanism to verify incoming Bitcoin transactions. PoW takes its name from the computational work that the nodes need to perform in order to solve a puzzle or a cryptographic hash function and validate the next block. Because each new block comes with a block prize (some amount of BTC), the nodes in the network compete for the validation. After each validation, a new block and its respective block prize are added to the blockchain. This is how Bitcoin mining works.
How Do Blockchain Blocks Work?
Blocks are units that constitute the blockchain. Around every 10 minutes, a new block is being generated on the Bitcoin blockchain. The time limit is kept constant on purpose. The time needed to create a block depends on the computing power allocated to the mining. Because of the severe competition in the mining industry, the overall hash rate assigned to Bitcoin mining is exceptionally high. To be able to keep the block time around 10 minutes, the block puzzle’s difficulty increases accordingly.
The last couple of years has seen extensive computing power being poured over Bitcoin mining and the emergence of mining pools that let nodes combine their computing power to get a higher chance of hitting the solution for the next block. This unanticipated increased amount of hash rate could lead to problems. For example, some nodes might create huge valid blocks that other miners are not able to verify because of their limited computing power, resulting in asynchronicity in the blockchain. Therefore, Satoshi silently implemented this piece of code to Bitcoin and added a limit to the block size.
Some people think that he did this to protect the network from hackers who might figure out how to use an unlimited block size in their favour. Also, 1 megabyte was already far larger than the size of the blocks that had been created until then. But as the Bitcoin network continued to grow, the block size limit started to seem like a burden.
The Bitcoin Scalability Problem
Currently, the Bitcoin network cannot efficiently validate large amounts of transaction data. Ever since powerful new mining hardware such as the ASIC miners entered the game, Bitcoin’s hash rate has increased significantly. Increasing the computing power might sound like a good thing, but within the dynamics of the PoW procedure, much of that hash rate is a side product of the competition to get the block prize. Plus, all that computing power is used to validate the same amount of transactions and mine the same amount of Bitcoin (BTC). A major concern among the cryptocurrency community is that the higher the hash rate gets, the slower and more congested the Bitcoin blockchain will be.
The current block size limit of 1MB allows a transaction throughput of 5 to 7 transactions per second. But if we want this technology to be more widespread, reaching many people around the world, we would need to increase the number of processed transactions per second.
This is a serious problem that Bitcoin is going through at the moment. Even though Satoshi made it impossible to generate blocks larger than 1MB, some proposals have been made to create a way around this rule.
Segregated Witness and Lightning Network (LN)
SegWit, SegWit2x, and the Lightning Network (LN) are all proposals for a faster verification mechanism for peer-to-peer transactions.
SegWit is a soft fork from Bitcoin, created with a minor alteration on its source code. Some cryptocurrencies such as Litecoin (LTC) are already using it. SegWit aims to increase both the number of transactions per block and the transaction speed. It works by splitting the block into two parts and reorganising the block data to place signatures somewhere else. By separating the witnesses from the transaction data, SegWit allows for more transactions to be stored in one block.
SegWit2x was planned to be a hard fork from Bitcoin, but it didn’t take place. The major difference between SegWit and SegWit2x is that SegWit2x includes an increase in the block size alongside a change in the transaction data processing. But since the increased block size from 1MB to 2MB could increase the burden on miners and node operators, the proposal didn’t get much support from the community.
Finally, LN is not a fork but a sort of patch to reduce transaction costs and increase transaction speed. It also allows transactions of cross-platform coins, meaning you can exchange coins across blockchains without the need for a crypto exchange. It has been applied to the Ethereum blockchain under the name of Plasma.
What’s the Size of the Bitcoin Blockchain?
Today, the Bitcoin blockchain size is almost 380 gigabytes (GB). When someone makes a new transaction on the blockchain, some relevant data regarding the transaction date and time, the amount sent, and the addresses of the sender and the receiver are stored on each new block. Because the blockchain is a decentralized ledger without a central authority, no single storage safeguards it. Instead, each full node in the blockchain has one copy of it that they compare continuously. You can think of the full nodes as obsessive note-takers to whom we owe the blockchain’s decentralized nature.
A Few Words Before You Go…
Now you know how big the Bitcoin blockchain is and how it is collectively operated by the network nodes. As more people join the Bitcoin ecosystem, the size of the blockchain will continue to grow exponentially. Unfortunately, this brings up the problem of scalability, for which the cryptocurrency community needs to find common ground if they are to move on to a more efficient peer-to-peer network.