Blockchain technology has revolutionized how we think about data security, transparency, and decentralization. At its core, a blockchain is a distributed ledger that records transactions across a network of computers. Let’s dive into how blockchains like Bitcoin and Ethereum function, their key differences, and why they’re transforming industries worldwide.
How the Bitcoin Blockchain Works
A Spreadsheet Analogy
Imagine a blockchain as a shared spreadsheet where:
- Everyone has access to the data in each cell.
- Each participant saves a copy to their computer.
- No one can alter existing data—this is called immutability.
To add a new cell (or transaction), a majority of participants must approve it. Once validated, the data becomes part of the permanent record.
Bitcoin Transactions
- Bitcoin (uppercase “B”) refers to the blockchain network.
- bitcoin (lowercase “b”) is the cryptocurrency used on the network.
When Alice sends Bob 1 bitcoin:
1. The transaction is recorded in Bitcoin’s public ledger.
2. The ledger shows the amount transferred and the addresses involved.
The Role of Miners
Miners verify transactions by solving complex mathematical puzzles:
- Transactions are grouped into a block.
- Miners compete to solve the block using computational power.
- The first miner to solve it earns newly minted bitcoin as a reward.
👉 Discover how Bitcoin mining rewards work
Once a block is verified, it’s linked to the previous block, forming a chain of blocks (hence “blockchain”).
Key Features of Bitcoin’s Blockchain
- Immutability: Data cannot be altered after validation.
- Decentralization: No single entity controls the network.
- Transparency: All transactions are publicly visible.
Consensus Algorithm
Nodes (network participants) enforce consensus rules:
- Transactions must follow community-agreed protocols.
- Changing rules requires 95% approval, preventing unilateral changes.
- Miners and nodes collaborate to maintain network integrity.
Bitcoin Mining Explained
Miners use the SHA-256 algorithm to generate hashes. The goal? Find a hash starting with “000” (a simplified example).
| Attempt | Hash Output |
|---|---|
| 1 | 088djldkh2h5h3kjhk24gd5h2h5h3kjhk24gd5kh2h5h |
| 6,518 | 00088djldkh2h5h3kjhk24gdjhk24gd5h2hk24g4f4 |
The first miner to solve the puzzle broadcasts the solution and earns bitcoin.
Block Confirmation Difficulty
- Bitcoin adjusts puzzle difficulty every 2,016 blocks to maintain a ~10-minute block time.
- Mining now requires specialized ASIC chips, making it energy-intensive.
Supply Limit
Only 21 million bitcoins will ever exist. Mining rewards halve every 210,000 blocks, ensuring scarcity.
How the Ethereum Blockchain Works
While similar to Bitcoin, Ethereum introduces smart contracts and a faster block time (~14 seconds).
Ethereum Accounts
- Externally Owned Accounts (EOAs): Controlled by private keys (like Bitcoin wallets).
- Contract Accounts: Run smart contracts and require ETH for transactions.
Transactions and Gas Fees
Every Ethereum transaction pays a gas fee (in ETH) to prevent spam. Complex operations cost more gas.
👉 Learn about Ethereum gas fees
Ethereum Virtual Machine (EVM)
The EVM executes smart contracts trustlessly:
- Developers write code in Solidity.
- Every node runs the EVM, ensuring uniform execution.
Mining and Uncles
Ethereum’s GHOST protocol rewards miners for “uncle blocks” (orphaned blocks), improving decentralization and security.
Transition to Proof of Stake (PoS)
Ethereum is shifting from Proof of Work (PoW) to Proof of Stake (PoS) with Casper:
- Validators stake ETH to propose/vote on blocks.
- Malicious actors lose their stake, incentivizing honesty.
Ether vs. Ethereum
- Ether (ETH): The cryptocurrency fueling transactions.
- Ethereum: The platform supporting decentralized apps (dApps).
FAQs
1. What makes blockchain immutable?
Once data is added to a block and validated, altering it would require changing every subsequent block—a near-impossible feat due to cryptographic hashing.
2. Can Bitcoin miners cheat the system?
Game theory and economic incentives discourage cheating. Miners profit more by following rules than attacking the network.
3. How is Ethereum different from Bitcoin?
Ethereum supports smart contracts and dApps, while Bitcoin focuses on peer-to-peer transactions.
4. What is a smart contract?
Self-executing code that automates agreements (e.g., releasing funds when conditions are met).
5. Why does Ethereum use gas fees?
Gas prevents spam and compensates miners for computational work.
6. Will Ethereum’s PoS reduce energy use?
Yes—PoS eliminates energy-intensive mining, cutting Ethereum’s carbon footprint by ~99%.
Blockchains combine cryptography, economics, and decentralization to create transparent, tamper-proof systems. Whether for currency (Bitcoin) or programmable contracts (Ethereum), this technology is reshaping finance, governance, and beyond.
For deeper insights into blockchain innovations, explore Ethereum’s latest upgrades.