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? This is useful information if you want to invest in cryptocurrency. Maybe, as an investor, you won’t have to deal 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 which the potential to completely change the world. When talking about blockchain, it’s often mentioned in the same sentence as Bitcoin. Since 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 it 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 is also not vulnerable for inflation. Furthermore, Bitcoin provides rapid payments, even between different countries. These fast payments are possible because of the blockchain technology and it is one of the biggest advantages of Bitcoin. However, the main reason why blockchain was invented, is to let users verify each other’s transactions. Mainly, because there is no central bank that controls everything.

Blockchain does not have a central bank

When the blockchain technology is used, banks cannot verify he 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 that registers all transactions 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 for everyone. All Bitcoin users can take a look in the Blockchain. So every user can verify if their transaction is really on the blockchain and everything went well. 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 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? Again, the blockchain is basically a ledger which includes all transactions, but it is not just one ledger. The blockchain exists of a lot of copies of this ledger and these copies are provided by the users. Since everyone gets the same copy, users cannot make any adjustments. Simply because it would be too obvious. When the copies do not match with each other, it is immediately clear that something is wrong. So, scamming is impossible. The system itself (blockchain) is actually pretty easy, but very effective.

When you make a transaction with Bitcoin it will 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 in the transaction. The following applies here, the more fee that is included in 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, it 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 in a typical transaction. Since we make use of a token, this token could represent money, but also 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, as a consumer, can compare products that you would like to buy. You can also check if the product is real and what it is made off. 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.