The Bitcoin blockchain: structure and functioning

Not only a distributed ledger: how it works and what the purpose of the Bitcoin blockchain is

• Blockchain and banking
• The structure of the blockchain: blocks, headers and transactions
• Security and inviolability
• The blockchain as timechain: ordering transactions in a decentralised environment

Blockchain and banking

In the traditional system, the bank checks the availability of funds and updates account balances. In Bitcoin, control is decentralised. The blockchain maintains the archive of all transactions, constantly updating itself. Every member of the Bitcoin network – every node – knows the global transaction history and constantly verifies its correctness. This redundant system, in which everyone knows everything, eliminates the need for a trusted third-party.

The structure of the blockchain: blocks, headers and transactions

The Bitcoin blockchain is composed of blocks connected in a chain. Each block is structured in two parts: the header and the transaction list.

• The header: contains key information such as the hash of the previous block, the Merkle root (an alphanumeric string that encapsulates the set of transactions contained in the block), the timestamp (a time code that indicates the approximate time the block was created), the target of the mining difficulty and the nonce. By running the SHA-256 hash function on this data, the miners generate the hash identifying the current block: a sort of unique fingerprint that links the block to the previous one (the hash of the latter being part of the data used to calculate the hash of the present block).
• The transaction list: reports the transactions in extended form that have taken place in the minutes since the last block was approved.

The concatenation of the blocks via the hash function creates a structure in which each block depends on the previous one, forming an unbroken, coherent chain.

Security and inviolability

The security of the blockchain is guaranteed by the interconnection of the blocks and the Proof-of-Work algorithm. The hash of each block is partly made up of the hash of the previous block, making it impossible to modify one block without recalculating all subsequent blocks. The computational power required grows exponentially with the number of blocks, making attacks uneconomical.

Convention dictates that a block becomes practically inviolable after six confirmations (subsequent blocks). This means that one hour after a block is approved, its content becomes an immutable part of Bitcoin’s history.

The blockchain as timechain: ordering transactions in a decentralised environment

In the digital world, the timing and ordering of events are crucial to ensure the integrity and consistency of information. But how can time order be established in a decentralised environment, where there is no central reference clock? The answer lies in the structure of the Bitcoin blockchain, which is also called timechain for this reason.

• The necessity of temporal order: in a decentralised environment, the order of events cannot be determined through a central clock, as it would introduce a vulnerability that could be attacked. Ordering events with certainty therefore becomes a crucial challenge.
• The Nakamoto Consensus and the Proof-of-Work: Satoshi Nakamoto solved this problem by implementing a decentralised clock via a Proof-of-Work based blockchain. In this system, everyone can validate what happened and the order in which events occurred. The solution is simple: the blockchain with the most accumulated computational work is considered the source of truth, an arrangement known as the Nakamoto Consensus.
• The limited applicability of blockchain in other contexts: decentralisation has its price in terms of efficiency. A blockchain is much slower and less efficient than a centralised ledger. When there is only one or a limited number of entities behind a project, the use of a blockchain may be useless. The value of timechain lies specifically in its ability to order events in a decentralised environment without the need for a central clock.

Conclusion

The function of the Bitcoin blockchain as a timechain goes beyond simply recording transactions, providing a means of establishing time order in a decentralised system. It is essential to recognise, however, that applications of blockchain outside of this context may be limited. In other words: in a decentralised environment, blockchain is a necessary evil whose limitations must be remedied by other technologies such as, for example, the Lightning Network.