Blockchain for beginners

By and large, transactions take place between strangers.

We don't often stop to think about it, but we place a great deal of trust in third parties -- be they banks or other payment services -- to authenticate, approve and keep records of our transactions. We ask -- and pay them -- to keep our accounts and protect our interests.

However, decentralisation is a hallmark of cryptocurrencies. Much of their appeal (lower fees, faster transaction times, use all around the world) lies in the fact that they are not subject to the management of governments or institutions.

But just how does this work in practice?

How are transactions in cryptocurrency authenticated and approved?

How are they processed and recorded?

Who's keeping the books?

Introducing blockchain technology.

A blockchain is an online, distributed ledger -- much like a database. It keeps records.

The technology gets its name from the systematic way that it groups, or 'blocks', information together in a chain-like fashion (more on this later).

Blockchain technology is:

  • Distributed. Whereas a bank ledger is maintained by a central authority, a blockchain is a decentralised, ledger distributed among the computers (nodes) in its network. Responsibility for maintaining entries in the ledger is shared by these nodes.
  • Updated in real time. Nodes in a blockchain network constantly refresh each other with the most recent version of the ledger as new blocks are created.
  • Transparent. In the case of public blockchains such as those used by most cryptocurrencies, the contents of a ledger are public and anyone can help to maintain them. A ledger is a shared database stored and updated on each and every node in its network.
  • Secure. Blockchain technology uses cryptography to process and confirm entries to the ledger. The science and maths behind these functions ensures that records are essentially immutable.

So, what does all this mean for cryptocurrency?

Cryptocurrency and blockchain technology

Blockchain technology solves the problem of centralisation of financial assets. It enables parties to transact online using digital money without the need for a 'middle man' to protect their interests and keep transaction records.

Just how does it do this?

  1. The relevant blockchain network is notified when a transaction takes place. Nodes (computers) in the network verify that a transaction is authentic and valid using the maths of cryptography.
  2. When a transaction is approved, it is grouped in a batch of transactions commonly termed a 'block'. Each transaction block is securely anchored in the chain by a reference to the previous block (hence, 'blockchain').

This reference to the preceding block makes the information stored by a blockchain very secure. This is because altering any transaction or block of transactions would mean altering all the blocks from that point forward.

This may sound feasible in theory; however there simply isn't enough computing power in the entire world to enable it to succeed. Blockchain technology is considered impenetrable.

How so?

Blockchain technology works via consensus. This means that a network automatically accepts the longest chain of blocks as the correct one on which to continue building.

In this way, transactions could only be tampered with if 51 percent of an entire blockchain network colluded to build an alternative version of the chain; a new version accepted by the majority of the network.

Therein lies the brilliance of blockchain technology. It masterfully authenticates, approves and records transactions with unparalleled security -- all without a third party in sight.

Banking on blockchain technology

'Secure public ledger' may at first appear a contradiction of terms. However, blockchain technology is just that; a decentralised public ledger providing confidence for cryptocurrency transactions.

When it comes to cryptocurrency, you can bank on blockchain technology.

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