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What is blockchain?

When talking about cryptocurrency the term blockchain is often used. Especially when Bitcoin is in the news, the technology behind the digital coin is often mentioned, but what exactly is this technology and how does it work? Knowing what blockchain exactly does and how it works is useful information if you want to invest in cryptocurrency. Maybe, as an investor, you won’t have much to do with this technology. Even so, if you understand how this technology works you will also know why coins like Ethereum and Bitcoin are so popular.

Bitcoin and blockchain

According to the World Economic Forum, blockchain is seen as one of the technologies that has the potential to completely change the world. When talking about blockchain, it’s often mentioned in the same breath as Bitcoin. The reason being that blockchain is made specially for the introduction of Bitcoin.

The idea of Bitcoin was developed in 2008 by Satoshi Nakamoto. We don’t exactly know who this person is, because it is an alias. Even 10 years after the release of this digital coin on the market we still don’t know who the real inventor is. Rumors are that is was a group of four who invented it. On the third of January 2009 Bitcoin was published as a global payment method without the intervention of a central bank. That is why the users themselves are responsible for the audits. The coin also is not vulnerable for inflation. Besides, Bitcoin provides rapid payments, even between different countries. These fast payments are thanked to its blockchain technology. That is one of the biggest advantages, but the main reason why blockchain was invented, is to make it possible for users to verify each others transactions. Mainly, because there is no central bank that controls everything.

Blockchain does not have a central bank

When the blockchain technology is used, there is no bank that verifies all transactions. Still, all users want to know that everything runs safely and reliable. That is where the blockchain comes into play. The blockchain is a ledger which registers all the transaction ever made with Bitcoin. Whether it is used for buying a pizza or investing a lot of money, everything is listed. The unique part of this blockchain list is the fact that it is public to everyone. All Bitcoin users can take a look in the Blockchain. Which means users can verify transactions of their credibility and check if everything is right. Even you can see all Bitcoin transactions via the Blockchain Explorer of Blockchain.com.

The technology that operates behind blockchain is also open source. As a result, everyone can see how this technology is programmed and everyone is allowed to make adjustments to this technology. That is the reason to why there are so many other coins besides Bitcoin. These new coins, most of the time, make use of the blockchain technology of Bitcoin, but then adjusted the code to a system they prefer. This is allowed, because the technology is open source.

It may sound scary that the system is so public. Everyone can view the transactions made and even the program code behind the system is open source. Yet this transparency also provides security.

How does my transaction enter the blockchain?

Now you know what the blockchain is, your next questions might be: how do all transactions made with Bitcoin enter the blockchain and how do these audits work? So, the blockchain is basically a ledger which includes all transactions. This is not just one ledger, of this ledger exist a lot of copies which are updated the moment a new transaction is made. These ledgers are provided by users. Because everyone gets the same copy, there cannot be made any adjustments by a user. Simply because it would be to obvious. When the copies do not match with each other, it is immediately clear that something is wrong. Scamming is impossible. The system itself (blockchain) is actually pretty easy, but very effective.

When you make a transaction with Bitcoin it wwill not get verified by a central bank, this happens on the blockchain. When you make a transaction, a block is made that includes your transaction. All transactions and blocks that are made are linked together in a chain. When your block is created, all blockchains that exist are updated in real time. If your transaction appears in all blockchain registers, your transaction is approved, and your cryptocurrency will be transferred. This whole process normally takes less than 10 minutes with Bitcoin. There are even cryptocurrencies where this process is much faster.

Who is checking all these transactions on the blockchain?

This is where the miners come in. Miners offer hash power to the network to reinforce the network and make it possible to send and receive transactions. This happens with very expensive equipment and often costs a lot of electricity. Most of the time green energy is used in countries that have an energy surplus. Miners are being paid in the form of a fee that is included with the transaction. The following applies here, the more fee is included with a transaction, the faster a transaction is picked up and processed. Miners not only earn money through fees, but they also get a reward when they successfully find a block. At the moment the block reward is 6.25 BTC and was reduced in 2020.

Blockchain outside of cryptocurrency

When transferring money via Bitcoin you do not send the money yourself, but you send a token. This is a line of code in which your digital wallet can see how much Bitcoin should be added to the wallet of the other person. So, you do not send real money like banks. Because we make use of a token, this token could stand for money, but also for other things like a house or a product, for example.

There are already blockchain technologies where you can check the authenticity of a product. In the blockchain of Bitcoin, every transaction is being maintained, but you can also reserve a blockchain spot for every product. As a result, you will be able to compare products you would like to buy and check if the product is real and what it is made off. You can do so as a consumer. The blockchain basically functions as a ledger where users can verify the content together. That does not only have to be a ledger of transactions.

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