What is the Bitcoin network?
The Bitcoin network is a peer-to-peer (P2P) network.
From the words of the Bitcoin God himself:
“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
The Bitcoin network is made up of computers running the Bitcoin software (also known as a Bitcoin client).
The software running is what makes the whole thing work.
Any computer on the Bitcoin network can “talk” with each other directly.
This is different from a client-server network where every computer on the network must first go through a central server.
In the real world, P2P networks don’t look as pretty and organized as above. Not every computer can connect directly with each other because….the world is too big.
So let’s keep it real….
Since there is no central server in a P2P network, it is a decentralized network.
Centralized vs. Decentralized Network
A decentralized network consists of “peers” that can run independently of each other.
Why does this matter?
There are two main reasons:
1. No Central Point of Failure
If one computer goes down, the network continues to run like it never existed. This is different from a centralized network.
In a centralized network configuration, like the client-server network, if the central server goes down, the entire network goes down with it.
This means that the Bitcoin network can not be shut down. Because there is no “server” to take down.
Each computer on the Bitcoin network is independent. If one fails, the network will still run successfully.
2. Decentralized Consensus
When using electronic money to make a payment, like with a bank transfer from your checking account, your transaction has to go through a trusted “middleman” or third party to settle the transaction by deducting funds from one account and adding them to another.
If this middleman settles the transaction, then the transaction is considered valid.
If I transferred you some money, you and I agree the money has actually transferred from my account to yours because we relied on a trusted intermediary or central authority…..the bank.So in this case, “consensus” on whether the transaction is valid requires centralization.
Bitcoin is different. It uses decentralized consensus.
The idea is that instead of relying on an intermediary, ALL the computers on the Bitcoin network have to come to an agreement by “consensus” on which transactions are valid.
Basically, the middleman is replaced by a network of computers.
HOW all of these computers actually come to a consensus will be explained in a later lesson.
For now, let’s take a look at how the Bitcoin network works.