My usual reaction to the words “blockchain” and “cryptocurrency” involves fighting off a sudden feeling of drowsiness and quickly navigating to more exciting areas of the Internet.
However, after learning the basics behind the technology and how it works, you understand why people are excited about the capabilities and power of blockchain.
The basic concept of blockchain is not difficult to understand, but the implementation of the technology could change the way the world works.
A problem with electronic transactions is the need for a third-party intermediary like a bank to authenticate and keep records of payments.
Without this, people could purchase items with money they don’t have, as there would be no record of their money being spent.
Blockchain removes this need for third parties in transactions by creating a distributed record which is possessed and verified by other users.
Essentially, other people keep a record of money spent and the order of transactions, removing the need for a bank.
This means you can pay cryptocurrency directly to somebody else without cheating the system, relying on the consensus of other nodes in the blockchain.
Other users record transactions and reach a consensus on the order of entries in the distributed ledger.
The system prevents double spending and becomes more secure with a higher number of people checking transactions.
The consensus-building process is conducted by people like Bitcoin miners, who earn a reward in Bitcoin for their work.
Blockchain vs Bitcoin
These two terms may be indistinguishable to newcomers.
Bitcoin is a cryptocurrency, meaning it is a currency with value that exists only as data – but can still be exchanged in a similar manner to traditional currency.
Bitcoin was created in 2008 as a peer-to-peer cash system concept which did not require a third-party intermediary.
The Bitcoin currency was a unique innovation, but it was the technology behind the peer-to-peer cash system which proved truly revolutionary.
Called blockchain, this backbone is the distributed ledger technology which allows a network of users to keep a record of transactions.
Bitcoin payments use blockchain technology, but blockchain can be used for other applications, including property transfers and contracts.
Security and Safety
Blockchain technology requires a large distributed network, where the ledger of transactions is recorded on each point in the network and every node is independent.
This distribution of data makes the system secure against fraud or interference. If a single block is forged and added to the chain, other nodes will find the data to be untrue.
Redundant copies of the blockchain are always available thanks to independent nodes constantly calculating new blocks.
The distributed ledger is public, but the transaction information in each block is hashed and encrypted, available only to those involved.
What’s in a Block?
Bitcoin miners use powerful, specialised software to collect transaction information and create blocks to add to the blockchain.
These miners form part of the consensus system used to maintain the record of transactions, and they earn a Bitcoin reward for each block calculated.
Blocks form part of the blockchain, and are comprised of four parts:
- Reference to the previous block
- Summary of included transaction
- Time stamp
- Proof of work for creating the block