Review: The Blockchain Code, Part 4: Full Node Bitcoin

This is Part 4 of a 7-part review of the book, The Blockchain Code, by Dave Kinsey. To read the previous installation, CLICK THIS LINK. For the next installation, CLICK THIS LINK. To start at the beginning, CLICK THIS LINK. Thanks for reading!

Full Node Bitcoin

Click book cover to find on Amazon.

When you start up your Bitcoin program and run Full Node mode for the first time, it will spend a few hours or days (depending on the speed of your computer) downloading the entire Bitcoin blockchain onto your hard drive.

The Bitcoin blockchain is a giant ledger that allows you to review every single Bitcoin transaction, large or small, that has ever occurred in the entire world, since Bitcoin began. The transactions are recorded chronologically in blocks of database entries, one block after another, in a singular chain, like a timeline. And a technology called distributed timestamping, ensures that the creation times attributed to each block are accurate, and not fraudulent.

The fact that you can review all of these transactions is the ingenious simplicity of blockchain. It’s part of the “cryptic” nature of cryptocurrency, and part of the trick to anonymity. Blockchain hides in plain sight!

The reason why the Bitcoin program allows you to see every Bitcoin transaction that has ever occurred in the blockchain, is so that you can confirm that all those transactions are valid and verified. After all, everyone else running Bitcoin can see them too, and everyone else’s copy has to be the exact same as your copy or big alarm bells will go off. Not literally, but people would lose trust in the system if they saw that a transaction on copy A was different from copy B, and so forth. So all the thousands of copies of the blockchain, scattered on computers throughout the globe, must match perfectly.

But what Bitcoin doesn’t allow anyone to see are the identities of the parties behind the transactions. In fact, the Bitcoin program doesn’t even know the identities. Rather, both parties in a given transaction are identified by two very long numbers, called addresses. One is the address that sent the bitcoin, and the other is the address that received it.

The transactions are recorded on an electronic ledger, using the MongoDB Atlas database. The Bitcoin program can read this database and display all the blocks of transactions on a PC screen, for human consumption. Each transaction shows the sender’s address, the receiver’s address, and the amount of bitcoin sent by the sender to the receiver.

And that’s it. That’s what makes blockchain private, anonymous, and protected from government scrutiny. Long numbers represent parties to transactions, rather than the real names of the parties. Thus, the parties can’t be identified.

But, you wonder, can’t transactions be traced back to the originating computers, even when numbers are used, thereby leading to the identity of the parties? Sure they can. Especially when they’re recorded on a centralized database, which is the usual method of traditional financial institutions. In that case, it only takes a few steps to trace electronic transactions back to their source.

But blockchain doesn’t use a centralized database. Rather, it uses a peer-to-peer (P2P) networking system. P2P means that all the computers in the network talk directly to each other, rather than through the “middleman” of a centralized server.

In addition to this, the blockchain network utilizes something called a “gossip protocol.” There are thousands and thousands of computers (or “servers,” to be more technical) in the blockchain network, and each computer is called a “node.” When a transaction originates on a node, it is transmitted (“gossiped”) to another node, which transmits it to another node, and on down the line, one node at a time, to all the other nodes in the network.

The transmission method uses the gossip protocol. This protocol randomizes the order in which each node receives, and then transmits the transaction data to a subsequent node. The result is a tangly, unpredictable, and very difficult web to unravel, when trying to trace the transaction back to the original node. In fact, it is so challenging to unravel, that governments lack the resources to undergo such a herculean task.

Usually. There are tricks that can sometimes work, when dealing with sloppy criminals. But for most intents and purposes, the transaction becomes untraceable.

And yet the transaction lives on in the record, presumably forever and ever, and for all eyes to see, by being recorded in the next block of the very, very, long blockchain.

This explanation of the blockchain should help answer the question as to what a bitcoin is. A bitcoin is nothing but a digital entry made in the blockchain. When a miner successfully “mines” a new block that is appended to the end of the blockchain (we’ll learn more about this later), he or she is rewarded with a certain amount of bitcoins that are created out of nothing.

When this creation of bitcoins is recorded in the blockchain, it appears in the ledger as a blank address for the sender, a long, numerical address for the miner receiving the bitcoins, and the amount of bitcoins the miner has received.

I must emphasize that nobody owns the Bitcoin program. It is open-source software. And nobody owns the blockchain network. It seems to have a life of its own, self-generating on the internet, due to the participation of all the different nodes it’s connected to.

The bitcoins it pays out to miners are automatically created by Bitcoin’s computer code. So no person pays miners to do what they’re doing. Rather, computer code pays them. And with bitcoins currently selling for about $24,000 each, miners are paid handsomely by this code.

Want to get in on the good graces of the code, and earn some of that coin? Well, it’s complicated. But I’ll give you an overview, based on what I learned from Kinsey’s book, on how bitcoin mining works. Hopefully this will clear up much of the mystery.

Go grab your hardhat and cap lamp, then come back in a few days, for a lesson in Bitcoin mining.


Categories: business

10 replies »

  1. A year or so ago the FBI famously traced several bitcoin payments to ransomware attackers and actually recovered the money from their bitcoin wallets. So, not as completely anonymous as it would seem.

    Several crypto exchanges have been famously hacked and looted as well. No FDIC for that.

    Liked by 2 people

    • Well, consider this. Suppose I paid you 3.582 bitcoins as ransom to unlock my computer. Soon after, you exchange that amount for U.S. dollars. The crypto-exchange is required to report this to the IRS through a 1099, for tax purposes. That identifies you. And because 3.582 is an unusual number, there likely won’t be many amounts like that going through the crypto exchange at that time. This would enable the FBI to infer your identity as the ransomware culprit.

      But a smart crook would only accept a whole number of bitcoins as payment, not fractions, and then exchange them one at a time. This would make it much more difficult to identify him.

      Those hack jobs of crypto exchanges may
      have been inside jobs. But due to the cryptic nature of bitcoin, it’s hard to prove. And yes, no FDIC.


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