Crypto 101: the blockchain

January 4, 2024
3 min read
blocks

Blockchain technology is the talk of the town and has been for many years now. It is often named when talking about the future of technology in general. There are thousands of possibilities with this technology, but it is best known as the technology behind cryptocurrencies. In this article, we will discuss what blockchain is and how it works.

What is a blockchain?

It is a distributed ledger technology (distributed ledger technology). For those familiar with accounting, ledger is not a new term. A general ledger account is, simply put, a collection of all income and expenses.

In the past, transactions and mutations were kept in writing: in paper ledgers that could only be accessed and checked by certain people. The Bitcoin blockchain has ensured that all information in the ledger can be viewed by anyone, at any time. The network of connected computers behind it is spread around the world.

Within the blockchain, there are two components: the block and the chain. Each block contains data about transactions and mutations. These blocks are connected by a chain. Hence the name.

Its very own protocol

Each participant in the Bitcoin network acts as a node in the network and keeps a copy of the database. This is not only to further decentralize the database but also to allow each node to verify past transactions using their copy. Each blockchain has its own protocol that defines the rules within the network and how nodes reach consensus on new and past entries in the database. One of the advantages is that participants do not have to trust each other, but rely on the protocol itself.

How does the Bitcoin blockchain work?

Each block in the Bitcoin blockchain contains data on transactions. Once a new block is verified, it is connected to the previous block via a cryptographic hash. In this way, all the blocks together form an immutable chain. If the hash of one block is changed, the entire blockchain becomes corrupted because each hash depends on the correct information of its predecessor.

To prevent these hashes from being easily produced, miners must solve complex cryptographic puzzles to find the correct hash that matches the block. This is known as "Proof of Work." Miners are not individuals with a puzzle book and a pencil, but small supercomputers who solve the puzzles digitally. The miner who manages to create the new block is rewarded.

Types of blockchains

Although Bitcoin is obviously the most well-known example of a blockchain, there are applications possible for all sorts of other sectors outside of crypto. Consider digital signatures, for example. Or to record logistics processes.

A blockchain is a decentralized database that can provide either private or public access to its ledger. Private blockchains are typically used within organizations for internal use or made available to paying customers. Public blockchains are accessible to anyone, and their software is often available for free.

The Bitcoin blockchain is also public: anyone with an Internet connection can view the current and all previous blocks at any time. And that is the beauty of it.

The information provided in our articles is intended solely for general informational purposes and does not constitute (financial) advice.

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