What is a blockchain?
Blockchain technology is the backbone of most cryptocurrencies, including Bitcoin. It’s essentially a decentralized, digital ledger that keeps track of all the transactions made throughout a peer-to-peer network.
Since this is an introductory article, let’s define a couple of those terms for clarity..
Decentralized means that the transactions and maintenance of the network are controlled by the users rather than a single entity. This makes the network resistant to censorship, and it enables permissionless participation – meaning that anyone can use it.
A digital ledger is a record of transactions (or other data) that is maintained across a network of computers rather than in a single location.
At its most basic level, a blockchain is made up of blocks, which contain a record of recent transactions. Each block is linked to the previous one, creating a chain of blocks – hence the term “block-chain”. Once a block is added to the blockchain, the data within it is considered to be immutable (permanent and unchangeable).
Each block in the chain contains a reference to the previous block. This means that once a block is added to the blockchain, it can’t really be tampered with. This, along with the use of complex mathematical algorithms and cryptography is what makes it so difficult for hackers to break the encryption and alter the data.
Related Article: Has bitcoin ever been hacked?
How does blockchain technology work?
A blockchain is maintained by a network of nodes, or computers, that work together to validate and record transactions. As mentioned above, this type of network is decentralized, meaning that it’s not controlled by any single entity, and is instead run by a distributed network of users.
One of the key features of blockchain technology is the use of cryptography to secure the network. Cryptography is used to secure the transactions and protect the integrity of the data stored on the blockchain. Each transaction is secured using a unique digital signature that is generated using a private key, and can be verified using a public key.
Related Article: What is public key cryptography?
The process of adding new blocks to the blockchain is known as mining. Miners are responsible for verifying and recording transactions, and for creating new blocks. In a proof-of-work consensus algorithm, miners must solve complex mathematical puzzles in order to add new blocks to the blockchain. In a proof-of-stake consensus algorithm, the validation of new blocks is determined by the proportion of tokens that a miner holds and is willing to “stake” as collateral.
Related Article: Bitcoin mining explained
What are the benefits of blockchain technology?
Blockchain technology is a much more significant invention than most people realize. The list of potential use cases is massive, but the most significant benefits, in my opinion, relate to finance.
For the first time ever, we have the ability to use decentralized digital currencies that are permissionless and secure. Prior to 2008, this just wasn’t possible. The so-called “elites” still have their grip on the financial system via their central banks and fiat currencies, but that could end tomorrow if people “woke up” and started using this new technology.
Related Article: 5 Ways Blockchain Technology Can Stomp Out Corruption
Here are 7 primary benefits that blockchains provide..
- Decentralization: Blockchain technology allows for a decentralized system, meaning that no single entity controls the network. This prevents censorship and makes it so that everyone can use it.
- Immutability: Once data is recorded on a blockchain, it’s permanent.
- Transparency: The data recorded on a blockchain is transparent and accessible to all who want to see. Of course, there are exceptions to this when speaking about privacy coins like Monero.
- Security: Advanced cryptography is used by blockchain technology to secure data and prevent unauthorized access.
- Efficiency: Blockchain technology allows for fast and efficient transactions.
- Smart contracts: Blockchain technology enables the use of smart contracts. To learn the ins and outs of smart contracts, what they do and how they function – read this article.
- Cost savings: Blockchain technology can help individuals and businesses save money by removing the need for middlemen and boosting efficiency.
Short Summary
A blockchain is decentralized, digital ledger that records all transactions made on a particular network. It’s called a blockchain because it’s essentially a chain of blocks that are linked together. The interlinking of the blocks creates a permanent record of all the transactions that have occurred. The use of cryptography, along with well thought out consensus algorithms (such as proof of work and proof of stake) makes them resistant to hacking.
The invention of blockchain tech, followed by Ethereum, has enabled smart contracts. To learn more about smart contracts and their many use cases – this is the article you should read next.