The Bitcoin blockchain is essentially an enormous, shared, encrypted list of all addresses that hold Bitcoin balances. Because this list is shared, it is referred to as a digital distributed ledger technology (DLT). Every new block represents the latest update to account balances. A block simply refers to a set of Bitcoin transactions that are related because they took place within the same time period. New blocks are created after further mining takes place or a transaction occurs where Bitcoin is exchanged.

Key Takeaways

  • The Bitcoin blockchain is essentially an enormous, shared, encrypted list of all addresses that hold Bitcoin balances.
  • Blockchains consist of a series of individual blocks, arranged in chronological order based on the order of transactions.
  • While a blockchain can be used to store any number of data points (votes in an election, product inventories, state identifications, deeds to homes, etc.), Bitcoin merely uses blockchain as a means to transparently record a ledger of payments.

Blocks are stacked on top of each other in such a way that one block depends on the previous. In this manner, a chain of blocks is created; this is where the term "blockchain" comes from. When a transaction is submitted to the Bitcoin network, the information is passed on through all Bitcoin nodes—all computers connected to other computers in the blockchain—at the same time (through the blockchain).

The Function of a Blockchain

In this way, it functions much like a public ledger, accounting for economic transactions and providing a way to verify that all Bitcoin users have been equipped with the same information. Everyone can download a copy of the blockchain and use it to trace the path of Bitcoins from one Bitcoin transaction to another. (It should be noted that although there is a record of every Bitcoin transaction ever made, they are linked to a specific Bitcoin address, rather than a personally-identifying name or email. For this reason, Bitcoin is considered pseudonymous.)

The goal of a blockchain is to allow digital information to be recorded and distributed to every participant, but never edited. This permanence is called immutability, which is a crucial feature of the blockchain data architecture. While a blockchain can be used to store any number of data points (votes in an election, product inventories, state identifications, deeds to homes, etc.), Bitcoin merely uses blockchain as a means to transparently record a ledger of payments.

In a blockchain, each node has a full record of the data that has been stored on the blockchain since its inception. For Bitcoin, this data includes the entire history of all Bitcoin transactions. If one node has an error in its data, it can use the thousands of other nodes as a reference point to correct itself.

Information Contained in Each Block

Blockchains consist of a series of individual blocks, arranged in chronological order based on the order of transactions. There are two parts to the information contained in a block.

The first part consists of the header elements: information about the location and other data related to the transactions contained within that block. For example, a hash within the header points to the previous block. There are no hashes for genesis blocks because these blocks have no predecessor. A merkle tree—a data structure used in computer science to record transactions—is used to display the sequence of transactions contained within the block. Another hash within the block contains timestamp information, the nonce, and the difficulty level. Here is a brief explanation of each of these components:

  • Timestamp information: displays the time and date of the block's creation
  • Nonce: the number that is required to be solved by miners
  • Difficulty level: denotes the difficulty of the problem being solved.

The second part is the identifier information. Again, this is a cryptographic hash function. It is generated by hashing the header elements twice in a row.

Blockchain More Anonymous Than a Bank Statement

One of the alleged benefits (or risks, depending on your outlook) of Bitcoin is its unique anonymity. Those transacting in Bitcoins are supposed to be tied to a specific Bitcoin address, rather than a personally-identifying name or email. Yet anonymity is somewhat compromised because of the blockchain information ledger.

Since every transaction is publicly logged, one single breach of ownership identity could lead to the revelation of many other owners by simply following back the transactions. The blockchain is still more anonymous than a bank statement, but it is not an impenetrable veil of secrecy, as some proponents of Bitcoin technology like to assert.