Blockchains are distributed ledger technology. In this section, we’ll go over what that means, discuss the benefits and drawbacks of blockchain-based applications, and outline how you can use blockchain analysis to your advantage.
Ok, what is a distributed ledger?
How does everyone know that the same bitcoin hasn’t been spent twice? Bitcoins are represented only as transactions and have no physical form. We know who owns which bitcoins because there is a public ledger with records of every bitcoin transaction ever made.
Bitcoin’s proof of work, where miners compete to solve math problems and choose the next block, acts as a consensus mechanism. All the nodes and miners need to agree on what the next block is going to be.
Once a block has been appended to the blockchain, it and all the transactions it contains are there permanently. Blockchains are immutable — once data is on there, it cannot be altered or removed.
In order to validate transactions and blocks, nodes and miners need to have a full and up-to-date copy of the Bitcoin blockchain accessible. There are upwards of 11,000 nodes active worldwide at the time of writing. Full copies of the blockchain are distributed around the world.
One way of understanding the blockchain is by conceptualizing it as a spreadsheet. After all, all blockchains are databases (though not all databases are blockchains). This spreadsheet is publicly viewable, but no one can remove entries.
Anyone can suggest a new entry, but it needs to be checked and verified before it’s added to the spreadsheet. Thousands of people have constantly updated copies of the spreadsheet.
If someone who hated spreadsheets decided to take it offline, they would be faced with the steep challenge of finding and shutting down every single server that hosted the spreadsheet.
Bitcoin was the first example of a working blockchain, but Bitcoin is not the blockchain — it is a protocol that runs using blockchain technology. There is no such thing as the blockchain, in the same way as there is no such thing as the computer, the postal service, or the pizza joint.
There are many computers, postal services, and pizza joints, all of which are unique and distinct entities.
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