Introduction
Since its invention, the popularity of Bitcoin (BTC) has been steadily increasing. Thanks to its advanced blockchain technology, we now have a wide variety of different cryptocurrencies. All cryptocurrencies are based on this technology and operate through a consensus mechanism. Whenever a transaction is made, the information is encrypted and stored on the blockchain irreversibly. The strength of the encryption depends on the number of miners on the blockchain, as they verify and encrypt the data.
But what exactly is blockchain technology, and how does the cryptocurrency ecosystem keep expanding? These are some of the questions we’ll address in our article today.
What Is Bitcoin?
Bitcoin is the first-ever cryptocurrency, invented by Satoshi Nakamoto in 2009. By harnessing blockchain technology, the Bitcoin network revolutionized how we see the future of finance and money. Bitcoin (BTC) is the most well-known and popular digital coin, with the highest price index and market capitalization among all cryptocurrencies.
Its invention and immediate success have established a growing cryptocurrency ecosystem and set the foundation for all subsequent altcoins. Some of these altcoins copied Bitcoin’s open-source code, 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 a significant role in decentralizing finance through cryptography. It allows most of our transactions to be conducted directly on a peer-to-peer basis without involving intermediaries like banks.
Although blockchain networks have greatly impacted global financial markets, finance is not the only area where blockchain is influential. Blockchain technology has applications in law, art, programming, and more, introducing tools like smart contracts, decentralized apps (dApps), and implications for patenting through NFTs and other tokens.
In the cryptocurrency ecosystem, the blockchain represents a system of ownership declaration between network nodes. In other words, a blockchain is a chain of encrypted data that keeps information about which wallet holds what amount of currency. This is done with the help of nodes (or miners) that continuously check and compare their blockchain copies while validating new transactions. When you think about Bitcoin, you might imagine it as just a virtual currency coded somewhere on the internet. But in fact, the blockchain is what constitutes the digital currency 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, they’re practically impossible to alter, ensuring the security of wallet ownership.
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, known as 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 preceding block 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 nodes need to perform to solve a puzzle or cryptographic hash function and validate the next block. Because each new block comes with a block reward (some amount of BTC), nodes in the network compete for the validation. After each validation, a new block and its respective reward are added to the blockchain. This is how Bitcoin mining works.
How Do Blockchain Blocks Work?
Blocks are the units that make up the blockchain. Approximately every 10 minutes, a new block is generated on the Bitcoin blockchain. This time interval is kept constant on purpose. The time needed to create a block depends on the computing power allocated to mining. Due to severe competition in the mining industry, the overall hash rate assigned to Bitcoin mining is exceptionally high. To maintain the block time around 10 minutes, the block puzzle’s difficulty increases accordingly.
In recent years, extensive computing power has been directed towards Bitcoin mining, leading to the emergence of mining pools that allow nodes to combine their computing power for a higher chance of solving the next block. This increased hash rate could lead to issues, such as some nodes creating huge valid blocks that other miners cannot verify due to limited computing power, resulting in blockchain asynchronicity. To address this, Satoshi silently implemented a block size limit in Bitcoin’s code.
Some believe this was done to protect the network from hackers who might exploit an unlimited block size. Initially, 1 megabyte was far larger than the blocks being created, but as the Bitcoin network grew, the block size limit became a burden.
The Bitcoin Scalability Problem
Currently, the Bitcoin network cannot efficiently handle large amounts of transaction data. With the introduction of powerful new mining hardware, like ASIC miners, Bitcoin’s hash rate has increased significantly. While increasing computing power might seem beneficial, within the dynamics of the PoW procedure, much of that hash rate is a byproduct of competition for the block reward. All that computing power is used to validate the same amount of transactions and mine the same amount of Bitcoin (BTC). A major concern in the cryptocurrency community is that as the hash rate increases, the Bitcoin blockchain could become slower and more congested.
The current block size limit of 1MB allows a transaction throughput of 5 to 7 transactions per second. For this technology to become more widespread, reaching many people globally, the number of processed transactions per second needs to increase.
This is a serious issue that Bitcoin is currently facing. Although Satoshi made it impossible to generate blocks larger than 1MB, some proposals have been made to find ways around this rule.
Segregated Witness and Lightning Network (LN)
SegWit, SegWit2x, and the Lightning Network (LN) are proposals aimed at creating a faster verification mechanism for peer-to-peer transactions.
SegWit is a soft fork of Bitcoin, created with a minor alteration to its source code. Some cryptocurrencies, like Litecoin (LTC), already use it. SegWit aims to increase both the number of transactions per block and transaction speed by splitting the block into two parts and reorganizing the block data to place signatures elsewhere. By separating the witnesses from the transaction data, SegWit allows more transactions to be stored in one block.
SegWit2x was planned as a hard fork of Bitcoin but did not take place. The main difference between SegWit and SegWit2x is that SegWit2x includes an increase in block size along with changes to transaction data processing. However, the proposal did not receive much support from the community due to concerns about the increased burden on miners and node operators.
LN is not a fork but a patch to reduce transaction costs and increase transaction speed. It also allows for cross-platform coin transactions, meaning coins can be exchanged across blockchains without needing a crypto exchange. LN has been implemented on the Ethereum blockchain under the name Plasma.
What’s the Size of the Bitcoin Blockchain?
Today, the Bitcoin blockchain size is nearly 380 gigabytes (GB). When someone makes a new transaction on the blockchain, data about the transaction date and time, the amount sent, and the addresses of the sender and receiver are stored in each new block. As a decentralized ledger without a central authority, no single storage safeguards it. Instead, each full node in the blockchain has a copy of it that they continuously compare. You can think of the full nodes as meticulous record-keepers to whom we owe the blockchain’s decentralized nature.
Conclusion
Now you know how big the Bitcoin blockchain is and how it is collectively maintained by the network nodes. As more people join the Bitcoin ecosystem, the blockchain size will continue to grow exponentially. Unfortunately, this brings up the problem of scalability, which the cryptocurrency community needs to address to move towards a more efficient peer-to-peer network.
