What is Blockchain? How Does It Work?
- By Localcoin
- July 10, 2023
Many current and aspiring crypto users have heard of “blockchain” — the technology that powers many cryptocurrencies, including Bitcoin. That said, there are many who don’t know what it actually is, how it works or why it’s so important. If this sounds like you, you’re definitely not alone. Considering how new cryptocurrency is, it can be hard to find answers to your questions, like “how does blockchain work?”
Gaining a better understanding of this question is important, as it can help you feel more confident when breaking into the world of cryptocurrency. So let’s get into the essentials of blockchain in an attempt to help you better understand its role in the cryptocurrency space!
Browse This Content:
- What is Blockchain Technology?
- Where Did Blockchain Technology Come From?
- Why is Blockchain Important to Decentralization?
- How Does Blockchain Work?
- The Role of the Blockchain Network in a Bitcoin Transaction
- Is Blockchain Secure?
What is Blockchain Technology?
A blockchain is a type of information-storing database that is shared amongst nodes in a computer network. A blockchain is operated in a decentralized way where no one computer has control over the database. Instead, every node in the network shares control of the network equally. Blockchain technology is best known for its role in the cryptocurrency space; for many crypto coins including Bitcoin, blockchain technology is used to maintain a secure, decentralized record of transactions, otherwise known as the coin’s digital ledger.
Where Did Blockchain Technology Come From?
Blockchain technology was essentially a by-product of the creation of Bitcoin! In 2009, the first blockchain database came to life to host the starting block of Bitcoin. Bitcoin was created by an individual or group using the pseudonym Satoshi Nakamoto. It was the world’s first digital token — one that operates separately from intermediaries such as governments and banks. Blockchain technology facilitates digital token transfers between individuals without the need for an intermediary.
By 2014, it became apparent that blockchain technology could be used for other purposes outside of just facilitating Bitcoin transactions, including setting up smart contracts. Still, the most common use for blockchain technology as of November 2021 is to record and validate cryptocurrency transactions.
Why is Blockchain Important to Decentralization?
Decentralization is a key part of the philosophy behind the creation of many cryptocurrencies. Blockchain’s capabilities allow cryptocurrencies to operate peer-to-peer, rather than through intermediaries such as banks and governments.
Thanks to this technology, buyers, sellers, lenders and borrowers alike can make secure, validated transactions without sharing any personal information with intermediaries.
With the current rapidly evolving landscape of blockchain technology, several trends are shaping its impact on decentralization and various industries. These blockchain development trends reflect the continued growth and maturation of blockchain solutions, providing new avenues for innovation and disruption.
How Does Blockchain Work?
How does blockchain technology work? It works a little differently from other databases. The method that blockchains use to structure data is what sets them apart. Instead of structuring data into tables, it works like so:
- A blockchain database collects information in groups, or “blocks.” A certain amount of information is needed to make one block.
- Once a block is filled with information, it is time-stamped and linked to the previous block using encryption.
- Linked blocks create a chain of blocks, thus “blockchain.” As a result, a blockchain becomes a chronological, encrypted dataset.
In order to work, blockchains are powered by nodes or individual computers owned by members of the network. Thousands of nodes have the same complete record of a blockchain’s data, making it impossible for one node to manipulate the information without the other computers connected to the network knowing about it. Nodes communicate in order to check and validate each new block of transactions added to a blockchain, solidifying them and making the transactions irreversible. All members of a given blockchain oversee it collectively and, ideally, abide by its rules and safeguard the security of the transactions.
The Role of The Blockchain Network in a Bitcoin Transaction
The behind-the-scenes of a Bitcoin transaction gives us insight into how cryptocurrency uses blockchain technology. In this step-by-step of a normal Bitcoin transaction, the role of blockchain technology is clear:
- When I want to make a transaction, I send or broadcast a file containing all the transaction information (how many Bitcoins are being traded, sender/recipient information, public address etc. ) to the blockchain from my crypto wallet.
- My transaction file is then analyzed by many different computers on the blockchain network to confirm its authenticity.
- From there, many different transaction files (including my own) are grouped together into blocks. Miners will then compete to have their block of transactions permanently added to the blockchain’s ledger, thus confirming those transactions and locking them in place.
- This “competition” involves using lots of computational power to try and be the first to solve for an encrypted hash value. The reward? Newly minted Bitcoins for the successful miner. This process is called the proof-of-work (PoW) protocol.
- I will then receive confirmations that measure how many new blocks have been added since my initial transaction, making it increasingly verifiable and irreversible.
- Each crypto coin has its own rules regarding the amount of confirmations to be “complete.” However, it is generally recommended that users wait for at least one confirmation to consider the coins successfully sent from, or received in, their wallet.
Because of environmental concerns related to the PoW protocol and the amount of energy usage required to verify transactions, proof-of-stake (PoS) has emerged as a viable alternative. However, this protocol has not yet been adopted by Bitcoin as of November 2021.
Is Blockchain Secure?
In theory, it’s nearly impossible to attack a blockchain network for the purposes of stealing cryptocurrency. This is due to the way in which blockchain networks are set up:
- Each block on the blockchain is encrypted with a hash (a unique string of characters that must be calculated using a lot of computational power). Plus, each block contains the hash of the previous block it was added on to as information accumulates in chronological order.
- Every node on the network has the exact same copy of the blockchain’s information.
In order to alter a block and steal cryptocurrency, a new hash would need to be generated for said block. Because each block contains the hash for the last block as well, the hacker would have to change every previous block on the blockchain. This would require the attacker to have more computational power than every node on the network combined in order to calculate the hash for every block faster than nodes can add new blocks. Because every node can access the same information, as the hacker attempts to change blocks, their changes would be rejected as they don’t align with the information that the other nodes on the network have. As a result of these safeguards, blockchains remain immutable, tamper-proof and very secure.
Also, find out how to keep your bitcoin safe after the FTX collapse.
In conclusion, blockchain technology has emerged as a revolutionary force with far-reaching implications. It has its origins in the quest for decentralized, trustless systems and has found its most prominent application in cryptocurrencies like Bitcoin. Blockchain's ability to secure transactions and data through distributed ledger technology showcases its potential for a wide range of industries beyond finance.
While it's a powerful tool, it's not without its challenges, including scalability and energy consumption concerns. Nevertheless, the future holds promise as innovators continue to harness the potential of blockchain, pushing the boundaries of what's possible in a decentralized, secure, and transparent digital world.
Now that you understand the basics of what blockchain is and what goes on behind the scenes in a crypto transaction, you can buy and sell your own crypto with confidence! Localcoin ATMs offer an accessible, user-friendly and secure way for anyone to buy and sell cryptocurrencies in their communities. Newcomers and experts alike can easily access Localcoin ATMs when and where they need to. As Canada’s largest Bitcoin ATM network with more than 700+ terminals across Canada and the U.S, it’s never been more convenient to buy and sell cryptocurrency.