What Is Blockchain and How Does It Work?

Everyone who knows what cryptocurrency is has probably heard of blockchain. But many people don’t know exactly what blockchain is or how it works. 

In the last few years, buying and selling cryptos, like Bitcoin, has become popular, and many people are using digital money.  BUT…The Bitcoin network is not controlled by any one organization. So, how do people buy, sell, or mine Bitcoin? Where is the transaction information saved? And how is it kept safe?

Bitcoin has a system, and it’s important to understand it before using it: blockchain.

If you want to know more about blockchain in cryptocurrency, keep reading!

What is blockchain?

Blockchain is a digital system for saving data. It stores information in connected blocks to make it very hard (or almost impossible) to change the data. 

At DigiAlpha, we like to explain things simply. So, if the above explanation is not clear, let’s make it easier: The main difference between blockchain and other databases (places where data is saved) is that blockchain is shared and secure. Unlike old systems, it doesn’t store data in one central location like an Excel file or a server. 

Blockchain works with many computers, and each computer has a copy of the data. This means it doesn’t need one main manager to control everything. Because of this, blockchain is called a shared ledger. 

With blockchain, all data and transactions can be saved forever, securely, and transparently. Anything valuable can be exchanged on this system. In theory, once something is recorded in the blockchain, it cannot be changed.  So, Bitcoin and other digital currencies use blockchain to save transaction details. But blockchain can also be used in any system that needs secure and shared data storage.

Still complicated? No problem… we make it way easier:

What is blockchain in simple words

Blockchain is a system to save and share information. What makes it different is that the information is shared with everyone in a network. Thanks to encryption and sharing, it’s almost impossible to hack, delete, or change the data. 

The idea of blockchain started with Bitcoin. Bitcoin uses blockchain to save details about people’s money. 

Here’s an example to understand what is blockchain in simple words:

Imagine you are with 100 people. You show a piece of paper with some information, and everyone takes a photo of it. Now, even if you destroy or change the paper, it won’t matter. Everyone has the original version on their phones. To change it, you’d need to take everyone’s phone and delete the photos, which is almost impossible. 

This is a blockchain example and this group can be millions of people, like in Bitcoin or Ethereum, or it can be a private group for a company or organization. 

Make sure to read: What is crypto exchange platform and how does it work

Features of blockchain

Blockchain technology has six main features: 

1. Unchangeable and Clear: Once data is saved, it can’t be changed or deleted, and everyone can see it. 
2. No Central Control: No single organization controls it. Computers called nodes manage it together. 
3. Strong Security: Data is protected with special codes (public and private keys), making it very hard to change or hack. 
4. Shared Record: Everyone in the network has a copy of the data, so everything is clear to all. 
5. Agreement System: Decisions are made when most of the nodes agree, which builds trust. 
6. Fast Transfers: Transactions are faster and cheaper than traditional banks, especially for sending money internationally. 

History of blockchain in simple words

Blockchain started as an idea for securely recording documents, expanded with Bitcoin for transactions, allowed smart contracts with Ethereum, and has now become a widespread technology with many different applications.

The beginning (1991)

Two scientists, Stuart Haber and Scott Stornetta, created a system to securely record documents with a timestamp that couldn’t be changed. A year later, they added something called a Merkle tree to make it more efficient. 

The rise of bitcoin (2008)

Satoshi Nakamoto used blockchain to create Bitcoin, the first digital currency. This technology allowed for peer-to-peer transactions without the need for a central authority. 

Phase 1: Transactions (2008-2013)

Bitcoin’s blockchain was only designed for transactions. This phase is called Blockchain 1.0. 

Phase 2: Smart contracts (2013-2015) 

Vitalik Buterin created Ethereum, which not only allowed transactions but also enabled smart contracts. This innovation turned blockchain from a simple system into a platform for creating decentralized applications. 

Phase 3: Applications (2018 and beyond):

Blockchain 3.0 includes new projects that improved issues like speed, scalability, and security. Examples include Neo, IOTA, Zcash, and Monero, offering more features. 

Make sure to read: How to create a cryptocurrency website?

Advantages of blockchain technology 

Blockchain technology, despite being complex, is a powerful and nearly unlimited way of keeping records in a decentralized system. Some of its advantages are:

1. Increased accuracy by removing human involvement

Thousands of computers and devices in the blockchain network help verify transactions. This means nothing is done by hand, which reduces human error. As a result, the information is more accurate. Even if one computer makes a mistake, it only happens in one version of the blockchain and the network will reject it.

2. Lower costs by removing middlemen 

When you do bank transactions or sign documents at a notary, you have to pay extra fees. Business owners also pay fees when they use card readers because banks and payment companies process these transactions. With blockchain, there are no middlemen, and only one small fee is paid.

3. Decentralization and harder to change data 

Blockchain does not store data in one central place. Instead, copies of the data are shared across all computers in the network. Every time a new block is added, the updated version is shared with all computers. Because the information is shared across the network and not stored in one central place, it is much harder to change or manipulate.

4. Fast, private, and safe transactions 

If you have done international bank transactions, you know it can take days for the money to reach the recipient. Blockchain works 24/7, all year long, and transactions can be completed in just a few minutes. Blockchain is much faster and more efficient than banks, especially for international transfers.

5. Open and transparent technology

Most blockchains are open-source, meaning everyone can see the code. However, no central authority can control or change the code. Anyone can suggest changes or improvements to the system. If most users agree that a change is good, the system can be updated.

6. Banking without banks 

Blockchain is a good alternative to traditional banks and helps protect information for people in countries with weak or unfair governments. The best thing about blockchain and digital currencies is that anyone, no matter their race, gender, or location, can use them.

Make sure to read: What is a crypto spot market?

Conclusion

In this article from DigiAlpha, we talked about blockchain technology and its applications. We saw that although blockchain is not immune to hacking, its decentralized nature provides much more security compared to centralized systems like banks. Additionally, understanding what is blockchain in cryptocurrency is essential for you, if you want to set up your own cryptocurrency platform.

The largest blockchain networks, such as Bitcoin and Ethereum, are accessible to anyone with a computer and an internet connection. The more nodes that participate in the blockchain, the more security is increased, rather than creating security concerns. Blockchain has great potential and can have countless applications in the real world.