Demystifying Blockchain: How Bitcoin and Ethereum Really Work

Most tech professionals are pragmatic and serious; many initially view Bitcoin skeptically, but this article decodes the core concepts of blockchain.

What Is a Blockchain?

A blockchain is essentially a distributed database, often described as a distributed ledger.

In a centralized system, transferring an apple to Roger requires permission from a bank-like intermediary (Bill). In a distributed system, the blockchain verifies ownership without such permission.

Although we only have 0s and 1s on the internet, these binary containers represent information, allowing shared ownership of data.

The key feature of blockchain is to eliminate mutual distrust by anchoring trust in mathematics and cloud computing.

Visualization of a blockchain.

Bitcoin

Bitcoin is a purely digital form of money, a database without any physical representation, where all computers maintain synchronized, authentic copies.

Created in 2009 by the mysterious Satoshi Nakamoto, Bitcoin functions as digital gold, valued for its utility and scarcity.

Its design solved the double-spending problem, and its source code is openly available on GitHub.

Bitcoin source code on GitHub.

How Bitcoin Transactions Work

Diagram of a Bitcoin transaction.

Bitcoin Advantages

First-mover advantage as the inaugural cryptocurrency.

Easy to split and recombine.

Counterfeit-resistant.

Low-cost, borderless transfer.

No third‑party permission required.

Bitcoin Disadvantages

High transaction fees, especially compared to its early days.

Scalability issues: limited block size (1 MB) leads to low throughput (~7 transactions per second).

Ethereum

Ether (ETH) is the native currency of the Ethereum platform, which enables developers to build decentralized applications (dApps) and smart contracts.

Founded by Vitalik Buterin, Ethereum also uses blockchain technology to maintain a distributed ledger of transactions.

Structure of an Ethereum transaction.

Smart contracts, a concept introduced by Nick Szabo, are self‑executing agreements where code runs when predefined conditions are met.

Illustration of a smart contract (vending‑machine example).

Ethereum Transaction Data

Each transaction records three essential pieces of information:

Sender account.

Recipient address.

Amount transferred.

Diagram of Ethereum transaction fields.

Gas is the fee paid to miners; its price fluctuates based on network demand.

Gas price chart.

What Is a dApp?

A decentralized application runs on a peer‑to‑peer network rather than a single server, offering benefits such as:

Payment processing without third‑party services.

User authentication via public/private key pairs.

Immutable on‑chain storage for critical data.

Transparent logging of events.

Trustable code, as both front‑end and contract code are publicly auditable.

Diagram of dApp architecture.

Conclusion

This article covered the basics of blockchain technology, Bitcoin, and Ethereum, providing a foundation for further exploration.