The blockchain technology creates cryptocurrency and makes it functional. This is the primary thing anyone must to know so as to know what Bitcoin is.
A blockchain may be a publicly accessible accounting book (ledger) that records all transactions made with a one currency. Blockchain technology can actually record transactions of any sort of digital information, but its most vital use so far has been enabling the movement of cryptocurrency between different people.
One method of understanding how a blockchain functions is to match it to a daily accounting book. A traditional accounting book is typically maintained and updated by a singular person or entity such like a bank.
It’s the bank that acts as a central authority by keeping track what proportion of money people have in their accounts and any transfers they create or receive. In this way a daily accounting book is ‘centralised’, with the bank acting as the go-between for all transactions.
A blockchain, on the other hand, is ‘decentralised’. This means that transactions are recorded on its ledger without a central authority verifying them. It might sound a bit complicated, but the subsequent analogy should assist you get to grips with how it works:
Think of a 5-a-side football that you’re twiddling with your friends, where there is no referee (central authority) present. As players, you will keep track of the score as the game proceeds, and therefore the game only continues if everyone agrees on the score shown on the scoreboard (ledger).
If one person from the ten thinks that the score is different, as an example they insist that their team is winning 3-1 when the others know the score is actually 2-1, the majority’s opinion takes priority. The same democratic process takes place with each new goal scored, and therefore the score is then adjusted to reflect which team scored the goal.
The blockchain is the football activity, the score as the transaction history, and agreeing whether a goal has been scored and who scored it is the verification of a transaction. All happening without a central authority (referee) updating the ledger (scoreboard).
Now you’ve got the essential premise, let us check out how an actual blockchain works. Do not worry if everything hasn’t clicked into place yet, browsing the subsequent sections will assist you build a better picture of what Bitcoin is.
What’s A ‘Block’ Within The Blockchain?
Blocks are groups of transactions stored on a blockchain.
Imagine keeping a record of your personal finances using a new, empty accounting book. As soon as you begin to record your transactions within the book, the pages within it start to fill up, and new pages will continually be added because the old ones are full.
If you picked out a transaction from a person’s page and altered it, the accounting book becomes useless after that instant, because the balance shown on the subsequent pages would be incorrect.
A ‘block’ within a blockchain is simply like a private page of an accounting book: it is a record of various transactions. When new transactions on the blockchain are verified, they’re grouped together in a single block. New blocks are then added on top of the ones created before, updating the ledger and creating a sequence of connected blocks: a blockchain.
In the same way that you simply cannot change one among the transactions on a previous page in your personal accounts book without invalidating all the next pages, you cannot modify a block once it’s been added to the blockchain.
Why You Should Bother
In a sentence, blockchain technology is vital because it removes middlemen.
You no longer require a centralised authority (such as a bank) to possess control over regular transactions, giving power back to regular people. At present, if you were to travel to your local main street shop, to shop for a pair of shoes with your debit card, the transaction would appear something like this:
You > Your bank > The shop’s bank > The shop.
This is because banks control your money for you. They have to verify that you simply have enough funds to finish a payment before they will transfer your funds to someone else; that ‘someone else’ is the shop owner’s bank, which would then add the funds to his/her account for them. Sounds like an excessively complicated process to buy shoes, no?
Blockchain technology removes the necessity for an intermediary such as a bank to oversee and record transactions. Here’s how a blockchain transaction works:
You > The shop.
During this process, no centralised banks are needed as this verification process is administered by the users of the blockchain themselves – a bit like how the score was maintained in the football game in section 1 above. Once this transaction has occurred, it will be added to a block, which can later be added to the blockchain.
What Problem Does Blockchain Technology Solve?
Blockchain technology provides an answer to what is commonly referred to as the ‘double-spending problem’.
Put simply, a blockchain stops people from the ability to spend an equivalent money twice, while removing the necessity for a central authority to oversee and verify transactions.
Take the example of cash. The double-spending problem doesn’t exist when spending cash because the exchange is physical: if you provide a £10 note to someone, you no longer possess that note and cannot therefore give it to another person. However, if you spend £10 digitally, it is more complicated to verify that you you simply do not have it in your possession and stop you from spending it again.
With digital currencies, a system must be in situ to prevent people spending an equivalent money more than once. Banks have patched over this problem through centralised control: taking charge of verifying every transaction that takes place between people’s accounts. By controlling everyone’s transactions, the bank decides what proportion of money everyone has in their account and ensures that no-one can transfer an equivalent £10 to 2 different people.
However, there is a catch. This also means banks have complete control over your money. If a bank is compromised by a malicious third party, or decides to act in a dishonest manner, its account holders could lose their money because ultimately their accounts are owned and controlled by the bank.
Blockchain technology solves the double-spending problem without the necessity for a bank. Each transaction on a blockchain is verified by its users, then added to the general public ledger of the blockchain (as explained in section 1b). Once you transfer £10 to somebody else, the transfer is recorded on the blockchain, proving that you simply not have that £10 and cannot spend it again.
The crucial part of this is the decentralisation of the process: you no longer have to place your trust in a central body to handle financial transactions. When banks are controlling everyone’s money, all the information is hidden away to be seen and managed by a few group of individuals.
These people are very powerful, therefore if they are corrupt or incompetent, then everyone with money within the bank is in danger. The blockchain is public and transparent, granting equal power to all or any of its users and taking it far away from shady financial institutions.
Solving the double spending problem with blockchain technology is what made cryptocurrency a viable alternative to ‘regular’ currencies.
So, What Is A Cryptocurrency?
A cryptocurrency can be described as digital currency that uses a blockchain technology to record transactions.
When you got to make a payment to someone, rather than transacting with regular fiat currency (e.g. pounds, euros, and dollars), you’ll got to use the cryptocurrency supported thereon blockchain. For example, the bitcoin currency sits on top of the Bitcoin blockchain. You cannot have a cryptocurrency without a blockchain.
The ‘crypto’ in cryptocurrency refers to cryptography. Cryptography is that process of encrypting information in order that it cannot be read by anyone aside from who it is intended for.
For instance, children passing coded notes in school that the teacher can’t understand may be a basic form of cryptography, the Enigma code employed by Germany in World War 2 represent a more advanced example.
When something has been encrypted, third parties can see it’s there but cannot decode it. This is how cryptocurrency moves on the blockchain. When coins are transferred between people, the blockchain publicly displays what proportion of cryptocurrency was moved, but not the identities of the people involved in the transaction.
Blockchain is a process of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.