A blockchain is a ledger of transactions stored in a decentralized manner on computers around the world. Each computer on which the blockchain is stored keeps a copy of the full chain of transactions for the network. Each time a record is created on the blockchain, every computer is updated so that all records have the same information.
Blockchain and Cryptocurrencies
Blockchain-based cryptocurrencies are built on top of blockchain technology. The first one, Bitcoin, is the most famous example. All transactions on the Bitcoin network are added to the blockchain by miners, who are incentivized by the creation of new coins.
Blockchain and Bitcoin
Though there are many different blockchains, the Bitcoin blockchain is the first and the most popular blockchain. Bitcoin is the first cryptocurrency to use blockchain technology. It was released as an open-source software in 2009 by a person or group of people under the name Satoshi Nakamoto.
How Does a Blockchain Work?
A blockchain is like a shared database on which the entire network relies. All confirmed transactions are included in the blockchain. This way, wallets can calculate their spendable balance and new transactions can be verified to be spending coins that are actually owned by the spender.
Every node of the network stores a copy of the blockchain. Whenever a new block is added to the blockchain, every connected node receives a notification, which in turn gets stored in its database. The integrity and the chronological order of the block chain are enforced with cryptography.
Blockchain data is distributed across a network of computers. A blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.
To be able to add new transactions to the blockchain, a node must show proof of work which solves a cryptographic puzzle, or proof of stake which proves ownership of economic value. The block is then added to the blockchain and the miner is rewarded with transaction fees and newly created bitcoin.
Mining & Staking
Without any central authority, how can a blockchain confirm who owns what? The answer is through mining or staking.
Proof-of-work is a mechanism that requires some work to be done in order to store a record of transactions. When a cryptocurrency transaction is made on the network, a record of it is added to a new block of recent transactions. This block is then added to the blockchain through a process called mining.
The process of adding a block to the blockchain is called solving a block. Solving a block requires a computer to solve a cryptographic problem. The first to solve the problem gets to add the block and is rewarded with new coins (In the Bitcoin network these are called bitcoin, or BTC). However, the difficulty of the problems that need to be solved increases as time goes on, to ensure the issuance of new bitcoin remains fixed.
If a malicious user tries to modify the blockchain, their blockchain will not match with the rest of the computers. The other computers will detect the discrepancy and reject the block.
Proof-of-stake works differently from proof-of-work. Proof-of-work requires miners to burn electricity and solve cryptographic problems in order to confirm transactions. Proof-of-stake requires users to show ownership of a certain amount of the cryptocurrency in order to confirm transactions. This means the more cryptocurrency you own, the more cryptographically secure your network is. This is because you have more to lose by attacking the network. So your investment helps secure the network.
The process of confirming transactions using proof-of-stake is called staking.
What Makes Blockchains Secure?
Blockchains are open, distributed ledgers that can record transactions between two parties efficiently and in a verifiable and permanent way. The blockchain ledger is not stored in any single location, meaning the records it keeps are truly public and easily verifiable. No centralized version of this information exists for a hacker to corrupt. Hosted by millions of computers simultaneously, its data is accessible to anyone on the internet.
Blockchain has the potential to revolutionize the way we do business. It is already changing many industries, including finance, healthcare, and real estate. It can change the way power grids are distributed, how supply chains are managed, how insurance claims are processed, how governments work, how banks work, how we vote, how we identify and verify people and organizations, and how we buy and sell goods and services.