3. Foundations of Blockchain

The blockchain is a decentralized data structure with internal consistency maintained through consensus reached by all the users on the current state of the network. It’s an enabling technology that resolved the Byzantine generals’ problem (message communication between untrusted parties) and opened up a new horizon of possibilities for trustless transactions and exchange of information. If the Internet democratized the peer-to-peer exchange of information, then the blockchain has democratized the peer-to-peer exchange of value. We begin this chapter by exploring how transactions work between users on the Bitcoin network. This entails a technical discussion of structures of a block and a transaction. We then dive into the role of wallets and user addresses. After talking about wallets, we shift our focus to simple payment verification (SPV) implemented in the Bitcoin network. SPV allows us to understand why blocks have a peculiar structure and more important, how the Bitcoin network can retain efficiency despite the network scaling at a high rate. Finally, we conclude our discussion by talking about hard and soft forks in the blockchain. We present the implications of forks in the context of forward compatibility for merchants and users involved in running the Bitcoin-core code.