Investing in crypto requires knowledge about the technology that runs behind it. If you want to keep your investment secure, then it’s important that you know about the blockchain, where all your cryptocurrency transactions are recorded. Learn more about this revolutionary technology here at BTC Post!
Blockchain is a decentralised ledger that stores transaction records in ‘blocks’. This block contains its own unique hash, as well as the hash of the previous block, thereby creating an immutable ‘chain’ of information.
It was first conceptualized in the 1990s by Stuart Haber and W. Scott Stornetta. In 2008, blockchain had its first real-world application with the emergence of Bitcoin and was developed by Satoshi Nakamoto as the top cryptocurrency’s underlying technology.
How does blockchain technology work?
The blockchain is distributed across a network of computers that validates every transaction and keeps it functioning. This is what makes it decentralized since no central authority or individual can own or control it. Additionally, once a block has been validated, it can no longer be tampered with without changing every block in the chain that comes after it.
There are three important concepts behind how blockchain works:
Blocks hold groups of valid crypto transactions that are hashed and encoded. Every block in the blockchain contains 4 components: a timestamp, reference to the previous block, a summary of the transactions, and Proof of Work. All of these components work to secure the data in the block.
Miners are responsible for adding new blocks onto the chain. This action is referred to as mining. To do so, they use powerful computers and special software to solve complex math problems to generate an accepted hash. After a successful mine, the change is accepted by all the nodes on the network and the miner who completed the task first will be incentivized.
Nodes are the special electronic devices used by the miners to keep copies of the blockchain. These devices check the details of the trade by verifying the information across all other nodes in the network to reach a consensus.
The core of blockchain technology is the consensus algorithm. This system is responsible for verifying the transactions, signature, and integrity of transactions. To make it simple, it ensures that all computers record the same data to guarantee its legitimacy.
This process can be divided into four basic steps:
- Record and transactions
Every transaction is recorded in a block. This record contains the details of the transaction and is then authenticated by the nodes in the network.
- Verification of transactions
Transactions are verified by the miners connected to the network and each independently checks to ensure the transaction is legitimate. Since the blockchain is decentralized, every node in the network needs to reach a consensus before a record is authenticated.
- Record is stored in the block
Once the transaction is verified, it will be stored in the block that contains a unique code known as a hash generated by miners, as well as the hash of the previous block.
- Block is added to the end of the blockchain
After the block is created and verified, it is added to the blockchain where another block will follow to continue the chain.
This protocol is what makes the blockchain secure, tamper-proof and immutable. It is basically impossible to alter a record since it will not be in agreement with the rest of the participants in the said network. To hack the blockchain, it would require changing all blocks that would demand insurmountable computing power and resources.
3 myths about blockchain explained
Although blockchain has now become more mainstream with the price surge of various coins in the market, there is still a lot of confusion and myths surrounding it. If you’re planning to start your crypto investment, it’s important to know what you’re getting into. Here are the most common misconceptions about the blockchain:
- Blockchain and Bitcoin is the same
Since Bitcoin and blockchain are both associated with Satoshi Nakamoto, people assume that they are the same thing, which isn’t true. Bitcoin is a cryptocurrency that can be exchanged directly between two parties without needing an intermediary like a bank. Meanwhile, blockchain is the technology that enables peer-to-peer transactions to be recorded on a public ledger distributed throughout the network.
- Blockchain can only be used in cryptocurrency
Blockchain and cryptocurrency work well together, but there isn’t just one use for blockchain. Every industry can make use of this technology. It can even be used in keeping records, sharing data, and processing payments.
There is a lot of potential for this technology to be incorporated into various industrial processes. Based on the current performance of cryptocurrency in the market and the reality of the blockchain’s features, many investors and business owners are now considering how else blockchain can be used in their industry.
- All cryptocurrencies use the same blockchain
There has been a common misconception where people think that there is only one blockchain used for all cryptocurrencies. However, this is not true.
Nowadays, there is a wide variety of blockchain and distributed ledger technology being built to accommodate the needs of specific industries. Cryptocurrencies like Bitcoin, Ethereum, and Litecoin use their own blockchains, each with their own features, services and protocols.
Types of blockchain
There are three general types of blockchain: public, private, and hybrid blockchain. Each of these blockchains performs specific functions that are centred around the industry it was created for:
- Private blockchain
A private blockchain is a centralized platform that requires permission to join the network. Most private blockchains are used within organizations and enterprises. The purpose of this blockchain is usually for voting, supply chain management, asset ownership, digital identity, etc.
- Public blockchain
This is a decentralized open-source platform that can be accessed by the public. Nowadays, public blockchains are generally used for cryptocurrency exchange.
- Hybrid blockchain
This type of blockchain combines both the private and public systems. Hybrid blockchains allow businesses to be flexible with the data they want to make public and keep private.
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