What is a Blockchain?
A blockchain is a large database used to store information such as transactions, programming code, and more. Decentralized blockchains are the most common form, and they are operated through a collection of computers called “nodes” running specific software.
Data about cryptocurrency transactions is stored in blocks. These are digital “rooms” that contain the data.
Each block can only hold so much data, and when that block is full, a new block is chained to – added to – the blockchain.
When the data has been confirmed true and correct, it cannot be changed or deleted! It’s like it’s locked in place. And every block that comes after it is connected to it so you can see the whole chain of blocks and all the information inside them. This is where the name “blockchain” comes from.
There are different types of blockchains.
Some are centralized, which means they are controlled by one company.
Others are decentralized, which means they are located on thousands of computers all over the world and are not controlled by a single entity.
A decentralized blockchain acts like a massive computer that is spread across the internet. Computers from across the world help operate the blockchain. It enables cryptocurrencies to be used or traded without the need for a bank or middleman.
All blockchains in cryptocurrency are basically used to keep accurate and unchangeable records of transactions.
Beyond that, cryptocurrency blockchains can be used for different purposes. One example is blockchains that can use systems (smart contracts) that can automate all the details of a transaction, such as buying and selling a car, transferring the title, getting insurance, and all required payments.
The two most well-known decentralized blockchains are the Bitcoin and Ethereum blockchains.
How does a blockchain work?
In cryptocurrency, a blockchain is a digital record-keeping ledger that stores cryptocurrency transaction information.
Think of it as a database. But unlike a regular database, where data is structured in tables, data on a blockchain is collected in blocks.
Each block has a fixed storage capacity. When it’s filled, the block is closed and linked to the previous block. This creates the chain of blocks that gives the technology its name.
Blockchains have these features:
Decentralized or Centralized
A decentralized blockchain means that data on the blockchain is not stored on a single server. Instead, it’s distributed among computers on the network. Each of these computers is called a node.
A single blockchain will have several thousand nodes spread out around the world. Since it is decentralized, these blockchains are outside the control of a single person or entity.
Centralized blockchains may be able to do the same functions, BUT it is controlled by a single company.
Every node on a decentralized blockchain gets the same data. Nodes also cross-reference to validate that data. This makes it practically impossible to change the data. So, if one node tries to modify a block, other nodes will quickly discover the wrong block and kick it out of the chain.
Each block also has its unique hash value (a long string of numbers) along with that of the previous block. The hash value is generated based on the data stored; it’s like a fingerprint. Interfering with data in a block changes its hash value and that of all the blocks after it.
To successfully change information already on a blockchain, a hacker would have to control 51% of the computers on the network. This is expensive and requires a great deal of computing power that nobody has. It is also what makes decentralized blockchains very secure places to store data.
Transparent yet private
Data on a decentralized blockchain is available for anyone to see. You can track any crypto transaction if you want to.
This may seem like the data is not private, but it is.
Let’s say you see a transaction where someone swapped ETH from their wallet in exchange for Bitcoin.
You can only see the wallet addresses involved in the transaction and the amount.
But you cannot see any personal details about who created or owns the wallet.
Process for making sure data is true and correct
As mentioned earlier, nodes on a decentralized blockchain work to make sure the data entered is true and correct – before it is entered into a block.
It only works if all the nodes agree that, “yes, all is correct and all is true.” This is called a consensus mechanism.
Decentralized blockchains are not all the same and often use different consensus mechanisms.
For example, Bitcoin uses a consensus mechanism called proof-of-work (PoW), and Ethereum uses a consensus mechanism called proof-of-stake (PoS).
How blockchains are used
Each blockchain is built differently based on what it was developed to be used for.
Take Bitcoin. The Bitcoin blockchain was built with one purpose: to power an alternative payment system using Bitcoin (BTC). Its coding and all of its features are designed for this one purpose.
Its consensus mechanism (how data is proven to be correct and true), block reward (how people are paid when they make sure data is entered correctly), and block rate (the speed at which data is entered into blocks) were built to manage just Bitcoin.
Ethereum takes a different approach. It uses its own digital currency called Ether (ETH). It can also use smart contracts to automate deals like buying and selling a car. It is also where decentralized cryptocurrency exchanges, lending/borrowing platforms, and even video games can operate.
Other blockchains, such as Solana and Binance Smart Chain (BSC), can also support smart contracts. But compared to Bitcoin and Ethereum, they are more centralized, which means they are controlled by a small group of developers who can decide how it is used. These blockchains are distributed (found in different locations), but because they are controlled by a small group, they’re not really decentralized.
History of Blockchains
Blockchain technology can be traced back to the 1980s, almost 20 years before cryptocurrency was invented. Blockchain technology was designed as a chain of blocks that used cryptography to prevent tampering with document timestamps.
It was not used widely until the “birth” of Bitcoin in 2009.
How the Bitcoin Blockchain paved the way
The Bitcoin blockchain is decentralized because it is not controlled by one company. Instead, it is on hundreds and thousands of computers worldwide, allowing users to trade directly with one another rather than going through a middleman like a bank.
Bitcoin paved the way for many other blockchain uses such as Ethereum, launched in 2015. The Ethereum blockchain lets people do much more than just buying and selling cryptocurrency.
Today, there are about 1,000 different blockchains. Also, there are many new ways to use this technology other than with cryptocurrencies.