What is a Blockchain, and How does it Work?

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Blockchain
Blockchain technology

Blockchain is the technology that underpins Bitcoin, the largest and most famous cryptocurrency so far. It became known in late 2008 when Satoshi Nakamoto published the study Bitcoin P2P e-cash. This was an electronic money system that was independent of intermediaries.

Today, Bitcoin is not the only cryptocurrency out there. After it, many others were created that have been called ‘Altcoin’, among them Litecoin and Dogecoin. Currently, one of the cryptocurrencies that have a strong position, just behind Bitcoin, is Ethereum. These digital currencies have something in common: they are supported by the Blockchain.

What is blockchain

Blockchain technology is nothing more than a public ledger (or ledger) that records a virtual currency transaction (the most popular of which is Bitcoin) so that this record is reliable and immutable.

That is, the blockchain records information such as the amount of bitcoin (or other currencies) transacted, who sent it, who received it, when this transaction was made and where in the book it is registered. This shows that transparency is one of the main attributes of the blockchain.

How does the blockchain work?

Until some time ago, it was necessary a third party that both parties trusted to guarantee the authenticity of the transactions (bank, auditor, notary, or Paypal) and that had a record or seal of veracity. Now, with the blockchain, this problem and double-spending disappear by combining P2P peer-to-peer technology with virtual currency and thus creating a new form of digital communication.

Likewise, the transactions included in the blocks are created by the members of the system. These are registered and transmitted to all nodes on the network. Thus, all members have the transaction information updated in real-time.

Transactions are made from so-called “wallets” or electronic purses. Wallets are encrypted files that work in a similar way to a bank account; they have two keys: public and private.

The public key is an alphanumeric string between 26 and 35 characters, it is the Bitcoin address, and it acts as the account number. In this way, for someone to send you bitcoins, you must first give them the public key and then receive the virtual currencies.

Meanwhile, the private key is used to authorize operations from your wallet. This process is what is known as asymmetric cryptography.

As steadily new transactions are flowing through the network, they will be added to a “pool” (similar to a cooperative) transaction without checking. This is where the figure of the so-called “miners” appears, who is in charge of choosing the transactions of these pools to create a new block of confirmed transactions.

The miners are dedicated to verifying the transactions that are taking place at the moment and fulfill two important functions: Create new bitcoins for each block that is mined and ensure that the transactions are real and legitimate.

Mining pools are sets of miners who work together to solve a block and divide the rewards awarded.

Thanks to the use of the blockchain that is synchronized between the nodes, the irreversibility of the transactions are achieved, which allows nobody to make fraud to benefit, modifying the account book to divert the bitcoins from one place to another without others knowing.

This ledger is safe because the linked blocks have a “hash” (encoded) pointer that links to the previous block; Furthermore, all information is public. Which means that although it protects the privacy of its users, it does allow control of the traceability of those transactions.

It should be noted that each block is a part of the chain with the following elements:

  • An alphanumeric code that links to the previous block.
  • A package of transactions.
  • Another alphanumeric code that will link to the back block.

Blockchain advantages

Allows you to make financial transactions safely and reliably

One of the main advantages of Blockchain is that it allows making financial transactions between two participants in a safe and reliable way. Intermediaries no longer participate, but it is the users themselves who have control of their information and the entire transaction. This information is distributed in multiple nodes independent of each other. They register and validate it without having to know the other participants.

It is transparent and, at the same time, private.

With this technology, transactions are more reliable for two reasons: they are transparent and also private. And the fact is that the movements, although they cannot be modified, are integrated into the network as a whole and are public; that is, they can be seen without problems by each of the parties. At the same time, the data from the transactions carried out between the parties are private. The information flow does not exist since the design is based on a chained code block.

The data is impossible to falsify

Another great advantage, which makes it even more reliable, is that once the transaction data has been recorded, it is impossible to falsify. They are immutable; that is, they cannot be modified or deleted. This is possible because it works with different forms of data verification. Therefore, the alteration of transactions by third parties is practically impossible. In addition, the database has a history with each of the operations since the creation of the technology.

It is an immediate process.

With banks, you have to wait a while for a transaction to complete. With Blockchain, since there are no intermediaries, the process is immediate. The computer system used for operations works 24 hours a day, every day. Since the information is transmitted and saved automatically, there is no need to wait.

Information is never lost.

Because many nodes participate in its validation, the information is secure. Even if the network went down, the service would never be lost and would continue to function. Why? It only takes one of the nodes to be active. This is achieved thanks to decentralized networks, which also makes it more resistant to malicious attacks since it does not have a central point of failure.

No mistakes

Banks can make mistakes in transactions, but Blockchain cannot. The data recorded on a blockchain is always correct because it is constantly checked by a network of people. The information that is recorded is agreed by all participants, and therefore, there are no errors.

The transaction cost is low.

One of the big problems for banks and foreign exchange platforms is the high commissions they charge. These are imposed, and there is nothing that users can do against it if they want to use the service. With Blockchain, users can free themselves from large commissions since the exchange of assets with this technology usually has a lower cost.

What is the future of the blockchain?

Experts on the subject compare the ‘boom’ of the blockchain with milestones such as the development of the Internet or the integration of computers in home use. That is, they point out that it is a system that will change the way of understanding business and society.

Likewise, they reveal that one of their maximum potentials will be Smart Contact (smart contracts). That is, with blockchain technology, agreements and transactions can be made in a confident way without revealing confidential information between the two parties. For example: selling products, renting a house, cars, etc., all online.

On the other hand, blockchain will be essential for the Internet of things. Our electronic devices will be able to communicate with each other in a secure and transparent way, say the experts. These smart devices will be able to buy products on the Internet automatically.

Currently, there are many projects that are being investigated to implement the blockchain as a structure that supports them. So it will be a matter of years (or months) before we see if it will really become the technology of the future.

See also: Take a moment to learn about Methods to make money with Bitcoin.