What Happens Behind The Scenes When You Trade A Bitcoin?

Introduction

Let's begin with the facts: The bitcoin as a digital coin does not exist, either physically or virtually. There's no actual code written for digital coins. What exists are the transactional records

Generally, any digital transaction takes place between 2 parties, the sender, and of course the receiver. In the Blockchain world, there is one more party that is involved in every single transaction. They are the ones who make this transaction successful. They are called miners.

The Miner

There are a fair amount miners available in the bitcoin world and they compete with each other to solve a mathematical problem that is required for each block of the transaction, and the winning miner gets the bitcoin and some of the transaction fee. 

So, the question is, why trade bitcoin, why not just become a miner?

The answer is, because miner needs to solve complex mathematical problems to run hash functions which needs a substantial amount of processing power and eventually it takes a toll on electrical power (hence Tesla backed out of the mining game), so traders delegate this responsibility on miners. It's expensive, time-consuming, and complex.

By now you must know Blockchain is the underlying technology of Bitcoin. 

Blockchain is a distributed database, where the blocks of data are organized in a structured manner. And it follows peer-to-peer networking, unlike traditional client-server architecture, where every node in blockchain has an equal right to perform duties. 

If your goal is just to trade bitcoins for financial gain then you don’t need to download the whole blockchain database onto your local machine, that's the job for a miner.
Sender and receiver as participants can be part of a blockchain network just by installing wallets. 

The benefit of using a wallet is that you don’t have to mine the blocks all by yourself since not everyone is fortunate enough to have supercomputers at home to mine a bitcoin. 

Wallets

Here are a few popular wallets used worldwide,

  1. Coinbase
  2. Gemini
  3. BlockFi
  4. Crypto.com
  5. Blockchain.info

Bitcoin as Cryptocurrency

Let's understand why it’s called crypto. The concept is wrapped around 2 keys: public and private keys. The public key is something people can know, it can be shared amongst the users, on another hand, there's a private key that must be kept secret. Let's understand this with the help of an example. On social media, every user is associated with UserName and Password. Your UserName could act as a Public Key and the password could be a private key. 

Now anyone on the internet can find you by knowing your UserName (i.e. public key) but only you can access your account by logging into the platform with your password. (i.e. with the help of a private key). 

That means the only authorized person can add the data. only you can upload a photo into your account and your friends on social media can like or comment on that photo. 

If one decides to add the data(add a new block in chain), all other nodes on the chain have to approve that the transaction is taking place then it's good to go. 

Let's name our roles,

  1. Sender: Bill Gates
  2. Receiver: Steve Jobs 

The distributed database follows Peer-to-peer network architecture

The good old Client-Server architecture.

Our Internet is backed by the client's server architecture, where the database resides on multiple servers (such as the main server, backup server, etc.) Let's understand this with an example. Facebook has its data servers scattered across the globe. For our example let’s take one of their data centers from Huntsville. When we like any photo on Facebook our request is sent to the Huntsville data center, then it’s queried either at the server-side or client-side and the filtered result is sent back to us on our mobile device. 

There is extended architecture to this client-server architecture called web-based architecture. The difference in this architecture is it has 3 tiers web client, the web server, and the database to share the workload.

In conclusion, if you can delete and modify data in database with these 2 architecture because of this it's easy to make fraud, spread fake news, runs propaganda and so on.

The Solution: Distributed database

Blockchain follows a peer-to-peer network architecture. Every node has an equal right and role to do and it has a flat hierarchy.

But why call it a distributed database? Because Blockchain's database is installed on every single node that wishes to use the database. As per our Bill and Steve's example whenever a transaction takes place in the network, the new block is added i.e. an entry in its ledger must be added and it must be approved by participating nodes. It's their way to agreeing to the change. If the ledger is altered or corrupted by any user, it will be rejected by the majority of the users in the network.

That's why it leaves no room for fraud in the blockchain network. Since the whole network participates in decision-making.

The database is Immutable

A blockchain ledger is immutable. This means you can add the blocks, but you can never be able to edit or delete the entries in the ledger. Our good old internet is depending on database architecture where database entries can be modified and deleted. So, what does it means to blockchain's database? If you made a mistake, then there is no UNDO option. So, if Bill sends 200 bitcoins to Steve instead of 100 then it's done, it’s a valid transaction. Now it depends on Steve's good nature whether to return the extra 100 bitcoins or not. So, with this advantage, you can't hide your crimes since they will always be present on the blockchain network. And with its architecture of a chain of blocks, it's easy to track the block and with a public key, it’s easy to track the owner of the block.

We also need to understand what address is for.

Address

Let's assume Bill and Steve are using one of the wallets. It means they are now part of the bitcoin network. Everyone on this network has an address. When you want to send money, you specify the address of a person/node to whom you wish to send bitcoin. 

The address is typically derived by a hash of a user's public key.  

  • Remember, no actual account exists!
    • In the Bank account, we have some information stored. In the Crypto world, it doesn't exist. it’s just the number of transactions associated with your Public Key Infrastructure, transactions contain the information about bitcoin you bought, sold then it is mapped across the network to validate your total. These transactional entries are called cryptocurrency public ledgers.
  • How do we link a transaction to a person?
    • Now we know blocks/transactions are associated with private and public keys. And we know we can find the owner with their public key. With a given architecture of blockchain, it's easy to trace all their transactions that were created with that key. But if you lose their private key, then YOU'RE DONE!! You lose access to all your holdings associated with that key. Hence the name cryptocurrency. 

To add a new block to the existing chain, there has to be a legit transaction and miners should successfully be able to generate the hash. These newly added blocks are dependent on the prior block. So, trying to insert a block, edit one, or delete prior blocks becomes almost impossible. They are dependent on each other because each new block's address is a hash of the previous one. Hence the name blockchain. If one tries to change a previous block, they will end up changing the hash, which will cause the subsequent block to fall crash and so on the whole network, hence it would not be permitted. 

Let's say Bill wants to transfer 100 bitcoins to Steve. Bill uses his wallet say Coinbase. Bill must specify Steve's address as the destination. And to perform this transaction there are small processing fees involved to pay miners.


Even though it is a transaction between 2 parties, still it will be distributed across the blockchain network, every node which is part of the network will be notified. There are 10 minutes of time involved in every transaction that is successfully performed on the blockchain's network. 

  • What's is this processing about?
    • The miner needs to move Bill's 100 bitcoins to Steve's account which needs two transactions to be added in the blockchain ledger, that is in simple terms adding two blocks to the network.
      • Move 100 bitcoins from Bill's account.
      • Adding 100 bitcoins from Steve's account.

Conclusion

Blockchain is new technology. It is surely promising with its decentralized structure, immutability, traceability, security. 

It has encouraging security, but it still involves hacking. If someone gains access to your private key, then that person can sell all the cryptocurrency from your account. Now private keys can be written down on paper or can be stored in the cloud but both techniques involve a risk.

Hackers have also started exploiting the ways through which they can use your computer to mine the bitcoin. Plus, now there are fake wallets, fake mining organizations.

In the end, it is a brand new and promising, exciting technology which can change the whole course of the internet. 

  1. It's redefining the architecture of the internet. 
  2. It's a new way of storing, accessing, and managing data. 
  3. Flat hierarchy, a single level of authority to everyone.

It’s providing new opportunities and industries have already started shaping themselves with this new network.

Cryptocurrency, NFTs are 2 popular applications and blockchain can help to address corrupted voting systems, it can help to redefine the architecture of farming, corporate, marketing and list go on...

Just remember when the internet was born on January 1, 1983, and slowly it started evolving, people were uncertain and hesitated to have their business on this new platform. Other groups who understood the concept of the internet and saw what it can bring to the table are now successful in their field some of them are billionaire and millionaires. So get your hands dirty when it's new and exciting. Trade Crypto, Learn NFTs, Understand the basics but START EXPLORING THIS NEW TECHNOLOGY.

Cheers