Blockchain

Now that we've covered the essential components of Bitcoin, let's zoom out and take a look at the Bitcoin blockchain as a whole.

The blockchain is a file containing every Bitcoin transaction that has ever occurred, added in blocks, which are all connected to each other, hence, blockchain.

When you run a Bitcoin node, the first thing it will do is download a copy of the entire blockchain.

It will do this by connecting to other nodes on the network and asking for a copy of the blockchain from them. As part of this process, nodes communicate the height (how many blocks) of their chain. Nodes do this continuously so they are always sharing the current state of the chain and replicating it across every node in the network.

As we discussed above in the mining section, new blocks are generated by miners, which then broadcast that new block to the other nodes, and they add it to their copy of the blockchain.

One thing we didn't address in the mining section is what happens when two blocks are mined at the same time. It is possible, and normal, for two miners to solve for two blocks at roughly the same time.

Since it takes time for changes to propagate across the network, nodes will receive different blocks at different times.

When this happens, nodes will take the first block they receive as part of their chain, and they will also accept the second, but it won't be considered part of the active chain.

At this point, some nodes in the network will be in disagreement about which block belongs at the tip of the chain.

How does this problem get solved?

When the next block is mined, it will be mined on top of only one of these two blocks, which now makes that particular chain the longest.

As a result, the nodes will drop the other chain since it is no longer the longest. This process of removing blocks from an older, inactive chain in favor of the blocks from the newer, active chain is called a chain reorganization.

What happens to the transactions in the block that was dropped? According to the network, they are invalid and do not exist. So if you try to spend bitcoins from an output that was contained in this dropped (orphan) block, it won't work.

But when two blocks are mined at about the same time they usually contain the same transactions, so nothing usually happens.

But even if there were some transactions contained in the orphan block that were not contained in the accepted block, they would just get sent back to the mempool to be picked up again, so the worst-case scenario is that it takes a little longer for the transaction to be processed.

But, this is not a guarantee, so it's a good idea to wait for your transaction to be included more than one block deep before considering it final.

So technically, Bitcoin blocks can be replaced. If theoretically, you were able to somehow produce enough blocks to create a longer chain than the one currently accepted by the nodes, then you could take over the network and put whatever data you wanted in those blocks.

The problem is this is technically next to impossible due to one of the key innovations we briefly touched on above, the difficulty adjustment.

The difficulty adjustment ensures that a certain amount of time has passed to create the current state of the chain. That's why I can't just create my own private Bitcoin chain and then push it out onto the network for nodes to adopt.

Okay but couldn't I just take the existing chain and build a new chain on top of it? You could, but you would need to be able to outpace the entire network of miners building on the longest chain.

Remember that the difficulty adjustment uses the average hashrate over the last two weeks, meaning that you would get nowhere trying to outpace the network at the current hashrate unless you hate over 50% of the mining power. At that point it would just be a matter of time until you were able to perform a re-org, depending on how far down the chain you wanted to replace transactions.

This is known as a 51% attack and while it is technically possible, it has never been done before.

Note that this is another thing that differentiates proof of work from proof of stake. In proof of stake protocols, we don't have this proof of the passage of time functionality built-in, so I can create as many false copies of a proof of stake chain as I want without having to expend any resources.

This means that a validator in a proof of stake system able to gain a majority of the required staked asset can swap the entire chain with one of their choosing and there would be no recourse, aside from hoping that the community would voluntarily adopt an honest version of the chain.

In a proof of work system, even if an attacker was able to successfully conduct a 51% attack, they still have to continue to maintain that power over a progressively longer period to reorg further down the chain. In a proof of stake system, it's game over.