Bitcoin & Blockchain Technology
Blockchain is the technology that underpins Bitcoin and allows its users to exchange value without a central intermediary. A blockchain is a database containing the entire history of Bitcoin transactions.
Bitcoin is a peer-to-peer currency that is a network of nodes running Bitcoin software. A node is able to receive and communicate transaction information with other nodes in the Bitcoin network. Bitcoin nodes store and verify the blockchain.
The Lightning Network facilitates instant, near-feeless payments for Bitcoin. These payments happen on a secondary network instead of Bitcoin’s blockchain.
Blockchain supports distributed networks, and its unique characteristics enable use-cases that were previously impossible. Blockchain allowed Bitcoin, a decentralized monetary system, to scale.
The Double Spend problem describes the difficulty of ensuring digital money is not easily duplicated. Bitcoin offers a trustless solution to the double spend problem, and third parties such as banks attempt to solve it as well.
Bitcoin has a variety of data types, most of which are represented by alphanumeric strings. These strings may seem indistinguishable at first, but each data type has a unique identifying marker.
Bitcoin Core is the most popular version of the Bitcoin software. It powers almost all of the nodes on the Bitcoin network, allowing them to enforce the same ruleset and achieve consensus.
In decentralized systems, a fork is a change to a protocol’s ruleset, usually reflected as a change in the source code. A fork can be a soft fork or a hard fork. Soft forks maintain backwards compatibility, while hard forks do not.
A smart contract is a digital agreement that is automatically executed and based on predefined criteria. Bitcoin’s scripting language enables powerful smart contracting features and additional smart contracts can be enabled on layers on top of Bitcoin.
Partially Signed Bitcoin Transactions (PSBTs) are a standardized format for communicating Bitcoin transactions before they are ready to be broadcast. The PSBT standard enables multiple parties on different devices to create and sign the same transaction sequentially.
A Bitcoin Improvement Proposal (BIP) is a formal proposal to change Bitcoin. The BIP process organizes the Bitcoin community in the absence of a centralized leader. BIPs can propose changes to Bitcoin's consensus layer, community standards, or the development process.
A blockchain is a database used to store information in batches, called blocks. Bitcoin, a monetary network, uses a blockchain as a ledger to organize its data, including a full history of transactions. Blockchains are only useful for supporting decentralized, trustless systems.
Taproot is a proposed upgrade to Bitcoin which will introduce Schnorr signatures, Pay-to-Taproot (P2TR) outputs, and new scripting capabilities. P2TR outputs offer great privacy improvements and enable Merkelized Alternative Script Types, a way for bitcoin to be locked to multiple scripts at once.
Schnorr signatures offer advantages over ECDSA in several areas. The introduction of Schnorr signatures to Bitcoin will improve privacy, scalability, and flexibility. Schnorr signatures are expected to be added to Bitcoin via the Taproot upgrade, which will be activated in the near future.
Bitcoin does not use accounts and user balances like most traditional financial systems. Instead, individual coins, called UTXOs, are controlled by specific parties. These coins can be transferred from one party to another in a Bitcoin transaction. The UTXO model allows Bitcoin users to audit Bitcoin’s total supply and solve the Double Spend Problem.
Segregated Witness, or SegWit, is an upgrade to Bitcoin that was activated in 2017 to fix transaction malleability and help Bitcoin scale. SegWit introduced two new address types and enabled the launch of the Lightning Network.
The Byzantine Generals Problem is a game theory problem, which describes the difficulty decentralized parties have in arriving at consensus without relying on a trusted central party. Bitcoin uses a Proof-of-Work mechanism and a blockchain to solve the Byzantine Generals Problem.
A node is an integral part of the Bitcoin network. Nodes enforce Bitcoin’s rule set and thus control Bitcoin. An individual should run a node to verify their bitcoin ownership trustlessly and ensure that other members follow the rules of the network.
Bitcoin uses a distributed ledger to publically record all transactions on the network. This ledger allows anyone to view the history of all bitcoin transactions and prove that no coin was double spent. Lastly, Proof-of-Work provides an objective way for Bitcoin users to agree on the state of the ledger.
A pull system is a payment system where the payee is the originator of the transaction, while a push system allows only the payer to originate a transaction. Pull systems rely on trusted third parties and incur higher costs.