Cryptocurrencies like Bitcoin and Ethereum have already been making rounds over the past few years. While most of the resources you find online focus on what digital currencies are, not a lot of people know the mechanisms behind cryptocurrencies—just like how we're aware of electricity but have little knowledge of how electricity actually works.
Blockchain technology is what fuels how cryptocurrencies are transferred and exchanged all over the world. Here we'll discuss what blockchain technology is, how it works, and how it ensures security, all in simple terms for beginners.
A blockchain is an online ledger that contains a master record of all cryptocurrency transactions, which is accessible by a network of users. The blockchain is like a full history of a bank's transactions from the beginning of time, with each block serving as an individual bank statement.
Usually, we use trusted intermediaries such as banks to make a financial transaction, authenticate it, and keep records of the transaction. Through blockchain technology, you remove the need for a third-party to do all of these things. A blockchain essentially allows consumers and suppliers to transact directly, all while keeping the transaction safe and secure.
Someone requests a transaction, such as when someone wants to buy something online and pay through Bitcoins. The transaction is represented digitally as a block. The block records your digital wallet addresses (though you are represented as an anonymous user), and where and when the transaction occurred.
Once the system is prompted of a new transaction, the requested transaction is then broadcasted to a peer-to-peer network consisting of computers, called nodes. These nodes are manned by people, typically programmers, called miners.
The network of nodes validates the transaction using a complex mathematical algorithm, a process called mining. Miners use powerful and specialized software to collect information and verify transactions. Basically, validation of a transaction is done through a consensus system of miners at even time intervals. Miners who manage to find a block, and in the process validate a transaction, are rewarded with cryptocurrency.
Once verified, the transaction is combined with other recently verified transactions to create a new block of data. Each block contains a timestamp of each transaction and a reference to the previous block in the chain. Once data is written to a block, the data becomes virtually permanent. The new block is then linked to the previous block through cryptography, creating a blockchain.
The completed transaction is then publicly recorded on the blockchain, and the chain is replicated across the entire network of nodes.
The transparency of the blockchain and the immutability of data recorded in a block come into play when it comes to security.
Blockchain technology works on a distributed and decentralized network. The distribution of data across the entire network of nodes makes the system secure against fraud. If a block is falsified, such in the case of counterfeiting fiat money, and the forged block is added to the chain, other nodes will find the data to be untrue.
Although the blockchain is open to the public, the information in each block is hashed and encrypted, and does not hold any personal information such as a person's name, etc.
It is also very challenging to hack the blockchain system, close to impossible, because to do so would require significant computational power, even possibly higher than the amount of power it takes to mine a single block.
Blockchain technology is revolutionizing the concept of cybersecurity. Today, the application of blockchains are expanding to other online assets other than cryptocurrencies—such as insurance, property titles, music, and taxes. Although blockchain technology is still quite new, it holds a vast amount of possibilities on how we transact and exchange value in the near future.
tags: cryptocurrency, bitcoin, blockchain, ethereum, digital money, virtual currency, mining, nodes, cryptography
article written by Kristenne Q.