The main technology on which the Bitcoin had been founded in 2008 is the blockchain. Bitcoin was the first of the crypto coins to have made its appearance in the world of cryptocurrency. It has a finite supply; in short, there can only be 21 million Bitcoins and no more. To start investing in the Bitcoin, it becomes imperative to understand the technology behind it and how it works.
What is the blockchain?
The blockchain is literally a set of blocks; data is stored in a public ledger called the blockchain. The blocks in the blockchain or ledger have three parts, namely the date, timing and data about transactions. It gives information about who participates in transactions without showing the actual identity of the user. The purchase gets stored in the ledger using a digital signature or a unique username. Every block will therefore have a unique hash that distinguishes it from other blocks. The hash is nothing but a cryptographic code which is made by special algorithms.
How does the blockchain work?
Whenever a block adds new data it gets added to this blockchain. Therefore, a blockchain will have many blocks chained together. For new blocks to be added there must be a transaction. This has to be then verified through a network of computers. These computers or nodes will confirm the transactions and after approval they get stored inside a block. Upon verification, every such block gets a unique code or hash. The block can be viewed by everyone but the identities of the sender or recipient of money remains confidential and hidden.
Every node in the network will have its own blockchain copy; so, there can be millions of copies of one blockchain. While every copy is identical, spreading information across multiple computers makes it very difficult to change the information. So, a hacker will have to manipulate every single copy of a blockchain to serve his purpose and this is practically impossible. While transactions are not totally anonymous, identities of parties remain anonymous.
Blockchain technology is responsible for security of data; to begin with, the blocks are stored chronologically and linearly and one cannot tamper with or change the block’s content. Every block has a unique hash and this is created by mathematical functions. When that data is edited, the code will automatically change. This is what protects data because a hacker cannot edit a block without changing the hash. Once a block’s hash is changed the hacker must change the hash in subsequent blocks too and this is a never-ending process demanding a huge amount of power.
Blockchain networks have set up tests for the nodes wanting to add blocks; these tests are consensus models requiring users to prove themselves. Bitcoin uses the Proof of Work algorithm, wherein computers have to prove that they have solved a cryptographic problem. This is done through mining which is not an easy process; to mine, you need specialized computers that demand a lot of energy and power. The Proof of Work cannot stop hacking but it will make attacks futile because a hacker will have to have more 50% of the power in a blockchain under his control to hack all the nodes.
This is why Bitcoin uses the blockchain technology. You will not have to ever worry about whether you money will be stolen, provided you store your coins in a digital wallet and backup your private and public keys.