In the context of Bitcoin, a distributed ledger network is anetwork of computers in which a public ledger of all transactions across thenetwork are maintained in a specifically designed structure. The network relieson a peer-to-peer network topology in which a public ledger of all transactionsis distributed, synchronized, and reproduced across the nodes of the network.Nodes in such a network are located across various geographical locations.Specific data structures called ‘blocks’ are used to maintain the records oftransactions. The blocks contain a chronolectal list of all transactions andare chained to previous blocks through application of cryptography.
The chainof blocks effectively creates an irreversible record of all transactionsdistributed across the network. Each node in the network has access to and canvalidate the blocks independently. Such a grouping of blocks is known asblockchain technology. Bitcoin uses a probabilistic consensus mechanism knownas ‘proof-of-work’ to reach consensus among the nodes of the network in adecentralized fashion. Such a consensus algorithm is used to address thedouble-spending problem inherent in peer-to-peer network transactions.Bitcoin has several beneficial properties for application ina distributed ledger network, which can be categorized by its three mainelements of transactions, consensus algorithm, and its communication network 1. Transactions in Bitcoin represent its sole state which amongother functions, allow transfer of value from one node to another.
Each transactionin Bitcoin is cryptographically secured using SHA-256 hash function and islinked to hash of the previous transaction such that transactions becomeirreversible in theory. Bitcoin’s transaction format enables it to be used as aprogrammable money. Users can specify specific instructions in each transactionto add specific features such as multi-signature and escrow payments throughits scripting features. To verify a transaction, Bitcoin requires to bepublished on the ledger network and their scripts to be validated. Redemptionof currency in Bitcoin transactions is achieved through a user’s private key. InBitcoin, users do not need to identify themselves and practically participatein the network pseudonymously. Such pseudonymous identities are established viapublic key hashes. Bitcoin also has an open-source software which allows anyonein the network to view, validate, and update the software.
Universal consensus in Bitcoin is achieved throughapplication of a probabilistic algorithm known as ‘proof-of-work’ without theneed for a central authority. In basic terms, proof-of-work is described assolving a computationally strenuous puzzle for a node to add a new block to theblockchain. The consensus blockchain in such a protocol is the longestblockchain produced at any instance and is determined probabilistically. Theproof-of-work consensus protocol in Bitcoin gives incentives to miners (nodesengaged in adding blocks in the network) by block rewards and transaction fees.
The communication network in Bitcoin allows any node toparticipate in the network and exit from it at any given time. Informationabout other nodes in the network is broadcast to other nodes. There is nocentral server or authority to control this network, although it relies on theexisting Internet infrastructures and is affected by network attributes of eachparticipating nodes such as bandwidth, latency, and channel reliability.Previous