Blockchain is a relatively new technology that allows publicly distributed ledgers that hold immutable data in a secure and encrypted manner to make sure transactions can never be altered
Since Bitcoin put cryptocurrency on the map with its shocking price explosion back in 2014, people looking to make revenue-generating investments started paying more attention to digital assets. But as much as you may want to jump into this potentially money-making trade, it’s always prudent to understand how it works.
For the uninitiated, cryptocurrency is a digital asset that’s pretty much intangible. It is run by blockchain technology to make sure all records of trading are kept despite the cryptocurrency not having a physical form. This is where it gets tricky since not many understand how this works.
What is blockchain?
Blockchain is a relatively new technology that allows publicly distributed ledgers that hold immutable data in a secure and encrypted manner to make sure transactions can never be altered. While Bitcoin and other digital assets are the most popular examples of blockchain usage, this “distributed ledger technology” (DLT) has been finding its way to many different industries around the world. Apart from financial transactions, data storage, real estate, asset management, and supply chain, many others are being explored.
Essentially, blockchain is a database that’s shared across a network of computers. When a record is added to the chain, the technology’s design or structure doesn't allow for any alteration. To make sure all the copies of the database are the same, the network does constant checks.
How does blockchain work?
To make it easy to understand, here’s how a deal goes down in a blockchain:
Step 1: A trade is recorded. Let’s say Mr. Anderson is selling two of his coins to Mr. Smith for $100. The record lists the details, including the digital signatures of both parties.
Step 2: The record is then checked by computers in the network called “nodes,” making sure all the details in the trade are valid.
Step 3: The records accepted by the network are added to a block wherein each block contains a unique code called a “hash.” This also includes the hash of the previous block in the chain.
Step 4: The block is then added to the chain and the hash codes conned the blocks together in a specified order.
A match function is responsible for creating a hash code that generates a string of letters and numbers from the digital information being recorded. A hash code has two essential characteristics:
- Regardless of the original file’s size, a hash function will always generate a code of the same length.
- Any change done to the original input will generate a new hash.
A changed hash breaks the chain. The next block in the chain still has the old hash, so a hacker would have to recalculate the hash to restore a broken chain including the next blocks in the series. Doing so would take a massive amount of computing power, making it extremely difficult to change anything without being detected.
The computers in the network of a blockchain database are decentralized and answer to no single “master.” This means all the nodes can access the information and compete to be the next one to add to the database.
The possibilities are endless
Blockchain technology has opened many doors across many industries in its application to improve processes. Payment processing and money transfers are cheaper. Transactions are more secure and contracts are made smarter. Pretty soon, its adoption will be widespread, so don’t be surprised if it becomes commonplace in processes you encounter on a daily basis.
To learn more about blockchain technology and how it works, go over this handy infographic and take in all the useful information you might need in your journey to cryptoland.