Blockchain technology has gone mainstream, as more companies and payment services than ever before have begun accepting cryptocurrencies as a payment option.
As such, more people than ever before have sparked an interest in learning as much as possible about it.
While not everyone is familiar with blockchain technology, certain people might have specific fears about learning more about it due to its usage of cryptography, anonymity, and the sheer magnitude of content available out there.
However, if you are interested in learning what the blockchain is, have no fear, as today, we will explain the basics of what you need to know about the functionality of the blockchain and why it’s important to the finance space and beyond.
The Blockchain and Its Functionality
In the simplest terms, a blockchain is essentially a list of blocks, where each block gets added one next to another, where every subsequent block within the list shares a bit of data from the previous block, alongside new generated data regarding a specific activity that occurred on top of the network. They are limited in file-size.
In more technical terms, a blockchain is essentially a distributed network that has a list of records that grows on a consistent basis, which is called blocks. They get linked together by utilizing a specific cryptographic algorithm, where each block features a cryptographic hash of the previous block alongside the transaction data.
The main difference between a centralized database and the blockchain is how its data gets structured.
A blockchain can collect information together in groups, which hold sets of information. Each block has a specified storage capacity, depending on the blockchain network’s specific rules, and when they get filled, they link to the previous block and form the chain.
Let’s imagine, for example, that someone wants to send a payment. Person A would initiate the process and sign the transaction to send a cryptocurrency to person B.
Then, miners within the network will need to confirm that the transaction in question is legitimate, or in other words, ensure that Person A has the right amount of cryptocurrency in the wallet that is being sent.
This is typically done by having the miners use computer hardware, such as graphic processing units (GPUs), in combination with the proper software to validate the transaction. Upon validation, the transaction occurs, the miners get rewarded with the network’s native cryptocurrency, and the block gets added to the one before it.
The first block that was ever mined within a blockchain is known as the “genesis block.”
Keep in mind, however, that numerous types of information can get stored on the blockchain, while the main and most popular use-case thus far has been for transaction processing.
Numerous blockchain networks have introduced different consensus mechanisms. The one described above is known as Proof-of-Work (PoW), but there’s also Proof-of-Stake (PoS), for example, which does not require expensive mining hardware but allows users to stake their tokens to secure the network.
Why Blockchain Technology Appeared
Most traditional databases are centralized, or in other words, the company that has issued the specified service has full control over them, and if a server goes offline or if electricity suddenly runs out, downtime can be experienced.
On the other hand, the blockchain lives on top of numerous computers, known as nodes.
All of them feature the exact same data surrounding the blockchain’s size, block height, hasharate, and other similar data. This ensures that the network remains as decentralized as possible.
This means that if any one of these nodes goes offline, the network will not be impacted in any significant way. Furthermore, no single authority has any control over the blockchain, which means that they cannot censor anyone, ban them, or remove them from the network.
Due to its decentralized structure, it is extremely difficult and expensive for hackers to potentially compromise the network, as they would need to somehow gain access and control over 51% of all of the nodes that make up the network, which is nearly impossible to accomplish.
Furthermore, the most popular blockchain networks out there have a high level of transparency, which allows anyone to view each transaction using their personal node or through leveraging a blockchain explorer, where they can review everything live.
Remember that each node features its own copy of the entire chain, which gets updated at the point in time when new blocks get added.
While you cannot connect or know who the owner behind a specific wallet address is, you can see that the native cryptocurrency did indeed move from one cryptocurrency wallet to another.
The Future of the Blockchain
Hopefully, now you have a much broader perspective as to what a blockchain is and how it works.
The main issues that blockchains aim to solve are transactions using virtual currencies so that users cannot “double spend” or spend the same amount of money twice whilst also maintaining a high level of security, privacy, anonymity, and transparency in their operation.
Many projects are now trying to solve the “blockchain trilemma,” where they are trying to create a network that has security, scalability, and decentralization. Typical blockchain networks will only feature two of these three traits. It is likely that in the future, we will see much quicker and more efficient blockchains.
