So far we have covered:
- Transactions are bundled into blocks
- Blocks are signed by the validators
- There's a limited block size and block time (rate at which blocks can be created).
The next thing to understand is that blocks are also chained.
Transactions are approved in units called "blocks."
The bitcoin protocol validates or "confirms" transactions in chunks called "blocks." It specifies that blocks can be no bigger than 1 megabyte, which means the number of transactions each block can contain is "capped." Not only that, but blocks can only be created once every ten minutes (on average).
Going back to the concrete example from earlier, it'...
The big insight that bitcoin makes here is that the ledger doesn't have to be centralized.
Going back to the town example, imagine that instead of having a chalkboard ledger in the middle of the town, you instead had everyone keep an up-to-date notebook containing the balances of themselves and everyone else in the town. Then, if you wanted to pay someone, you'd have to update the balances of yourself and your counterparty not only in your own personal ledgers, but you'd also have to update them in everyone else's ledgers as well. If you could do this, you'd have what would collectively be called a decentralized ledger, consisting of all the information across everyone's notebooks.
To understand how the Bitcoin protocol is able to work in a decentralized fashion, without any middlemen, let's take a simple example of how modern banking institutions function today.
The Town Ledger
Imagine you live in a small town where everyone starts off with $100 in cash in the form of paper money. Whenever you want to pay someone, you give them some of your paper money, and whenever you get paid, you receive paper money. The paper money serves as a basic form of accounting and makes intuitive sense. But the big insight that modern finance makes here is that you don't actually need the paper in order to do the accounting.
Imagine that there was a big chalkboard in the center of the town that kept track of everyone's cash balance. We'll call this chalkboard the ledger. In particular, the ledger has everyone's name with their balance in dollars right beside it.
There are still several things about the origin of Bitcoin that are quite mysterious...
Nobody knows who created it.
Even to this day, the jury's out on who wrote the initial paper and software. We just know his alias: Satoshi Nakamoto. There's a lot of speculation about who did it — check out the top candidates on Wikipedia. Most of people on the list are just the earliest adopters who admit to having downloaded Satoshi's software in the early days, but when you ask any of them if they're actually Satoshi, they all refute the possibility pretty firmly and pretty believably.
