Bitcoin was launched in 2009 with the dream to free all transactions from the intervention of any centralized authority like a government or financial institution. It also brought to the forefront such terminologies as Blockchain and Peer-to-Peer Technology which till then were unheard of by the common man. In fact, Bitcoin has been defined by its creator Satoshi Nakamoto himself, as a P2P (Peer-to-Peer) Electronic Cash System. Over the years, with an ever-growing rise in popularity of Bitcoins, and the increasing number of crypto-investors, the above-mentioned terms are now in frequent usage, especially in the global financial sector. There is a big debate among crypto experts: can Bitcoin cause a financial crisis?
To understand fully how cryptocurrency works, it is imperative that we simplify the concepts of peer-to-peer technology and blockchain. First, we shall try to explore each concept individually and then understand how these two are intrinsically linked and are responsible for the very existence of Bitcoin.
Simply defined, when multiple devices are connected together to form a network, it is called a peer-to-peer (P2P) network. They are used to store information as well as share them. All the users or nodes have equal access to all stored data. The key element of such a network is the absence of a centralized institution or a central server. Each user in the network can be both a server as well as a client. As a server, a node uploads files to the other nodes, while as a client, it downloads files from other users. These files are stored on their hard drives. The exchange and sharing of files are facilitated by their software applications.
As all nodes can store, download and upload information simultaneously, this feature ensures that the P2P network is faster and more efficient compared to the more conservative models.
Blockchain is defined as an immutable distributed digital ledger. Simply put, it is the database that is shared among the nodes in a network. A blockchain stores data in digital format. The structure of the blockchain is such that it stores data in groups also called blocks. Each block has a limited storage capacity and once it is filled, it is closed and linked to the previously filled block thus forming a chain of information. New data is stored in a new block till it reaches its storage limit. It is then locked and this new block of data is linked to the chain of blocks and the process continues in chronological order. Another feature that sets it apart is that each block is assigned a timestamp the moment it gets linked to the chain.
The information in these blocks can be shared and stored by any node but data once locked in a block cannot be edited, deleted, or destroyed. Altering data is almost impossible as each block has its own hash code. Hash codes convert digital data into an array of letters and numbers. Attempt to alter data changes the hash code.
How are Blockchain and Peer-To-Peer Technology Linked?
All Bitcoin transactions are stored in Blockchains. Blockchain technology is based on the Peer-to-Peer network. So, it can be safely said that the concept of Bitcoin is essentially based on these two systems; the Blockchain, and the P2P network.
The P2P network’s main feature is decentralization. This enables each node to own a complete copy of the ledger and in the event of a discrepancy, the ledgers of the nodes can be compared to check the accuracy. Therefore, the source of the forgery will be identified. This guarantees the transparency of all transactions.
The decentralized structure of both blockchain and P2P that enables the transaction of Bitcoins almost anywhere in the world in an instant is what makes these two technologies so different from the traditional financial networking systems and together they form a networking system that is efficient, fast, protect the identities of the users and most importantly, each transaction is accessible to all.
Together, Blockchain and Peer-to-Peer technologies have revolutionized the financial world with the introduction of cryptocurrency. Blockchains are the building blocks of Bitcoins and are founded on P2P technology. Bitcoins are here to stay.