The Bitcoin blockchain is managed by software running on computers that communicate with each other forming a network. Although multiple compatible software implementations exist, the most used software is called ‘Bitcoin Core’ and source code to this software is published on GitHub.

7 key features of the Bitcoin blockchain

Here are 7 key features of the Bitcoin blockchain:

1. Decentralization: The Bitcoin blockchain operates in a decentralized manner, with no central authority or governing body controlling it.

2. Security: Transactions on the Bitcoin blockchain are secured through cryptography and verified by a network of nodes using a consensus mechanism.

3. Immutability: Once a transaction is recorded on the Bitcoin blockchain, it cannot be altered or deleted, providing a high level of data immutability.

4. Pseudonymity: While Bitcoin transactions are public and recorded on the blockchain, the identities of the parties involved in the transactions are not directly linked to their real-world identities.

5. Programmability: The Bitcoin blockchain allows for the creation of smart contracts and decentralized applications (dApps) through the use of its scripting language.

6. Limited supply: The maximum supply of Bitcoin is capped at 21 million, which ensures scarcity and can contribute to its value.

7. Global accessibility: As a decentralized and borderless digital currency, Bitcoin is accessible to anyone with an internet connection and can be used for transactions anywhere in the world.

Bitcoin blockchain functionalities 

This software contains the full range of functionalities needed for the network to exist. It can perform the following tasks which will be explained in this section:

• Connect with other participants in the Bitcoin network
• Download the bitcoin blockchain from other participants
• Store the bitcoin blockchain
• Listen for new transactions
• Validate those transactions
• Store those transactions
• Relay valid transactions to other nodes
• Listen for new blocks
• Validate those blocks
• Store those blocks as part of its blockchain
• Relay valid blocks
• Create new blocks
• ‘Mine’ new blocks
• Manage addresses
• Create and send transactions

However, in practice, the software is usually only used for its bookkeeping function, which will be explained in depth in this section.

To understand how Bitcoin works, and why it works the way it does, it is important to keep in mind the objective: to create an electronic payment system that cannot be censored, and to allow anyone the ability to send payments ‘directly from one party to another without going through a financial institution’. Such a system cannot have a central administrator managing the ledger, as that administrator would be the financial institution that Bitcoin is set up to avoid.

The system therefore needs to be able to be operated by anyone, without any need to identify themselves or gain permission from a gatekeeper. The moment that parties need to identify themselves, they lose privacy and are vulnerable to interference, coercion, prison, or worse.

This goes for both administrators of the system and users themselves. So, every single part of the solution needs to work with these constraints in mind. How did Satoshi go about designing the solution?

Let us start with a classic centralized model and then try to decentralize it. In this way, we can build up the design of Bitcoin step by step.

Bitcoin blockchain and Classic Centralized Model:

Let us start with a ledger which keeps tracks of balances, managed by an administrator. You can think of it was a list with two columns: Account, Balance.

The administrator assigns account numbers to customers, and customers make payments by instructing the administrator.

There is an authentication process were the customer proves that they are the account holder before the administrator will carry out the payment instruction. So, each customer is named and, for security, has a password linked to their account.

The administrator maintains the central record of balances and makes all payments. They are responsible for ensuring that no one spends money they don’t have or spends the same money more than once, the ‘double spend’.

But if we want resistance to control and censorship, and to allow anyone to be able to transact with anyone else, we need to remove the administrator. First, let’s remove the administrator from the account opening process, so that anyone can open an account without needing permission from the administrator.

Bitcoin blockchain Problem: Accounts Need Permission

Someone must set up an account and assign it to you. It is the administrator’s job to assign you an unused account number then set you up with some sort of username (which may be your own name) and password so that when you ask the administrator to make a payment on your behalf, the administrator knows it is really you are making the request. In setting up your account the administrator has granted permission for you to open the account, and may, equally, choose to refuse that permission.

Any time you have an entity that can approve or deny something, you have a point of third party control. We are trying to eliminate third party control. Is there a way you can open an account without having to ask permission? Well, cryptography provides a solution.

Bitcoin blockchain Solution: Use Public Keys as Account Numbers

Instead of names or account numbers and passwords, why not use public keys as the account number, and digital signatures instead of passwords? By using public keys as account numbers, anyone can create their own accounts with their own computer without having to ask an administrator for an account number.

Remember, a public key is derived from a private key, which is a number picked at random. So you create an account by picking a random number (your private key) and doing some math’s on it to get your public key. In Bitcoin and most other cryptocurrencies, account numbers are mathematically derived from public keys (not public keys themselves), and are called addresses.

You can tell the world this Bitcoin address to allow people to pay to it82. No one can spend anything from it unless they have the private key, which only you have. You can also create as many addresses as you want, and your wallet software will manage all of them for you.

Bitcoin address mechanism:

Could someone else already be using an address that you randomly picked? Possible, but unlikely. We saw in the cryptography section that Bitcoin’s scheme uses a random number between 0 and 115,792,089,237,316,195,423,570,985,008,687,907,853,269,984,665,640,564,039,45 as a private key.

There are so many private keys available that the possibility of stumbling across someone else’s account is virtually nil. As one commentator put it, ‘Go back to bed and don’t worry about this ever happening’.

Public/private keypairs also solve the authentication problem.

You do not have to log in to prove that you are the account holder. When sending a payment instruction, you digitally sign the transaction with your private key, and this signature proves to the administrator that the instruction is indeed coming from you, the account holder.

You can create and sign the transaction offline without being connected to any network. When you broadcast the signed transaction to the administrator, all the administrator must do is check that the digital signature is valid for the respective account number, rather than maintain a list of usernames and passwords for you and all transacting parties.

Problem: Single Central Bookkeeper

We have now eliminated the role of the third-party administrator in creating accounts. But we still have the third-party administrator in the role of central bookkeeper—the coordinator who maintains the list of transactions and balances and who both validates and orders the transactions you request against some business and technical rules.

This single point of control ultimately decides what is reflected in your  account, whether your transaction goes through or not. As a single point of control, it is classified as a financial institution, and has the regulatory burden of having to identify you and all other customers, a process known as Know Your Customer or KYC. It can also be coerced to censor transactions. So, for a digital cash system resistant to third party influence, including control and censorship, we need to remove that single point of control.

Solution: Replicate the Books

The more people you have sharing a secure system and its information, the less vulnerable that information is to manipulation. However, a group of ‘trusted bookkeepers would inevitably require their own gatekeeper, so we would be back to the central point of control problem again. The solution is for anyone anywhere to be able to be a bookkeeper without asking permission from anyone else and without hierarchy. And all bookkeepers, wherever they are, maintain the same complete books of record and are peers of equal seniority, with checks and balances such that if any single bookkeeper was forced to try to censor a transaction or manipulate the database, the others would ignore or exclude them.

If all bookkeepers maintain identical records of which transactions are included and which excluded, we have a more resilient system. If any individual bookkeeper is forced to stop work, the others can continue. Anyone can join this network of bookkeepers without needing permission from anyone else.

So the network is resilient to anyone joining or leaving at any time. In Bitcoin, any individual with a computer, adequate storage, and access to internet bandwidth can download some software (or write their own), connect to a few neighbors and become a bookkeeper. New transactions are broadcast to all bookkeepers via a gossip network, and each bookkeeper relays new transactions to as many others as they are connected. This ensures eventual propagation of transactions to all bookkeepers.

Conclusion

The Bitcoin blockchain is a revolutionary technology that has changed the way we think about money and transactions. Its decentralized nature, cryptographic security, and transparency have made it a popular choice for individuals and institutions alike. However, as with any new technology, it has its challenges and limitations.

The keys to understanding and unlocking the full potential of the Bitcoin blockchain lie in educating oneself about its intricacies, staying informed about the latest developments and trends, and being mindful of its environmental impact. With continued innovation and collaboration, the future of the Bitcoin blockchain is bright and promising, and it has the potential to shape the future of finance and commerce for generations to come.