Cryptocurrencies like Dogecoin and Ethereum are powered by a technology called the blockchain. In its most basic form, a blockchain is a list of transactions that can be viewed and verified by anyone. For example, the Bitcoin blockchain contains a record of all the times someone has sent or received a bitcoin. Both cryptocurrencies and the blockchain technology that powers them make it possible to transfer value online without the need for an intermediary such as a bank or credit card company.
- Almost all cryptocurrencies, such as Bitcoin, Ethereum, Bitcoin Cash, and Litecoin, are secured using blockchain networks. This means that an enormous amount of computing power is constantly verifying its accuracy.
- The list of transactions found in the blockchain is essential for most cryptocurrencies since it allows to secure payments that will be made between people who do not know each other, without the need to resort to a third party to verify the transaction, such as a bank.
- Due to the cryptographic nature of these networks, payments made via the blockchain can be more secure than regular debit or credit card transactions. For example, when you make a payment with Bitcoin, you do not need to provide any sensitive information. This means that the risk related to the security of your financial information or the possibility of your identity being stolen is practically zero.
- Also, blockchain technology is exciting because it can be used for so much more than cryptocurrencies. Blockchains are being used to explore medical research, improve the accuracy of medical records, optimize supply chains, and much more.
What are some advantages of blockchains?
- They are global – Cryptocurrencies can be sent anywhere in the world quickly and cheaply.
- They improve privacy – Payments made with cryptocurrencies do not require you to include your personal information, giving you protection from hacking or identity theft.
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How does blockchain work?
Imagine a chain that could be used for a ship’s anchor. However, in this case, each link in the chain is a piece of information that contains transaction data. At the top of the chain, you see what happened today, and as you go further, you see older and older transactions. And what happens if one reaches the end, where the anchor rests on the bottom of the bay? That means he saw every single transaction in the history of that cryptocurrency. This gives the blockchain powerful security advantages: it is an open and transparent record of the entire history of a cryptocurrency. If someone tries to manipulate a transaction, he will break the link, and consequently, the whole network will see what happened. In short, that is the explanation of the blockchain.
- Another way people often refer to the blockchain is in the form of a ledger
(sometimes you will come across the terms “distributed ledger” or “immutable ledger”) which is similar to a bank’s balance sheet. Like bank ledgers, the blockchain records all the money that comes in goes out, and passes through the network. - However, unlike bank books, no single person or legal entity, including banks and governments, maintains a cryptocurrency blockchain. In fact, it is totally decentralized. Instead, it is secured by large peer-to-peer computer networks running open-source software. The network constantly reviews and ensures the accuracy of the blockchain.
- Where do the new cryptocurrencies come from? Every so often (about every ten minutes in the case of Bitcoin), a new piece of transaction information, also called a new block, is added to the information that already exists. As a reward for contributing their computing power to maintain the blockchain, the network gives participants a small amount of digital currency.
- A chain of cryptocurrency blocks is distributed throughout the network of said digital currency. No company, country, or third party has control over it and anyone can participate.
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| How is money sent and received via a blockchain? The cryptocurrency network assigns as each user to have a unique “address”, which is made up of a private secret key and a public secret key. Anyone can send you money with your public key, which is similar to an email address. Whenever you want to spend your money, you use the private key, which is basically your password, to digitally “sign” transactions. The easiest way to manage your crypto is through a wallet, which you can get from an exchange like Coinbase. |
Who invented the blockchain?
In late 2008, Satoshi Nakamoto, a person or group by that name, published a white paper online explaining the underlying principles of a new type of digital money called Bitcoin. All subsequent cryptocurrencies are an evolution of the ideas explained in the document.
- Nakamoto’s goal was to create digital money that would enable online transactions between two strangers anywhere in the world, without the need for a third-party intermediary like a credit card company or a payment processor like PayPal.
- To achieve this, a system was needed that would eliminate a complex issue called the “double spending” problem, in which a person can use the same money more than once. As a solution, a network was created that constantly verifies the movement of Bitcoin. That network is the blockchain.
- Every Bitcoin transaction is stored and verified by a worldwide network of computers that are outside the control of any one person, company, or country.
- The database that stores all that information is called a blockchain. Bitcoins are “mined” with this huge decentralized network of computers (also known as peer-to-peer) which also constantly verifies and ensures the accuracy of the blockchain. As a reward for contributing their computing power to the blockchain, miners receive small amounts of cryptocurrency.
- Every bitcoin transaction is reflected in the ledger, and new information is periodically gathered into a “block,” which is added to all previous blocks.
- The collective computing power of the miners is used to ensure the accuracy of the ever-increasing ledger. Bitcoin cannot exist if it is not linked to the blockchain; every new Bitcoin is recorded on it, as is every subsequent transaction with all existing coins.
What is the future of blockchains?
The blockchain concept turned out to be a platform on which a huge range of applications can be built. It is still a new technology that is developing rapidly, but many experts agree that blockchain has the potential to change the way we live and work, similar to what happened to potential public Internet protocols like HTML during the 1990s.
- The Bitcoin Cash and Litecoin blockchains work very similarly to the original Bitcoin blockchain. The Ethereum blockchain is a further step in the evolutionary ladder of the distributed ledger concept, as, unlike the Bitcoin blockchain, it is not designed just to manage digital money. (Having said that, Ethereum is a cryptocurrency and can obviously be used to send value to someone else.) Imagine that the Ethereum blockchain is akin to a powerful and highly flexible computing platform that allows coders to easily build all kinds of applications by leveraging the blockchain.
- For example, suppose a charity wants to send money to thousands of people every day for a year. With Ethereum, only a few lines of code are needed. Or maybe you’re a game developer who wants to create items, like swords and armor, that can be traded outside of the game itself? Ethereum is also designed to achieve that goal.
