What is Blockchain technology?
Have you ever wondered how is blockchain different from your traditional payment gateway? Here is the simplest version that every layman could understand.
We are here today to discuss the technology that underlies all cryptocurrencies. BLOCKCHAIN. Understanding Blockchain is a significant key to understanding how cryptocurrencies work.
Blockchains are created with the purpose of eliminating the red tapes associated with the intermediaries in day-to-day transactions. When we talk about intermediaries, the banks and other payment processors are getting more popular today- our virtual wallets- Google Pay, Apple wallets, Amazon Pay, PayPal, WePay, Venmo, etc. So now, just how is Blockchain replacing these services? Let us take a look.
A Blockchain, to put it in simple terms, is a publicly distributed ledger. A ledger is a list of who owns what. These intermediaries that we talked about also have their own ledgers. However, their ledgers are confidential and not accessible to the general population. Blockchains work a little differently in this aspect. Blockchains are decentralized since the network is entirely unrelated individuals, and no one entity holds all the power.
Blockchain distributes the ledger to thousands of people across the world. Each person has a copy of their own and can check it against everyone else’s to ensure no fraudulent activity has occurred. Now say a person was to go back into the ledger and manipulate a transaction on the list. This manipulated transaction is reflected in every copy of the ledger worldwide, and everyone can identify the transaction as fake.
FUN FACT: Blockchains can be used for far more things than financial transactions and Crypto. It can store, validate, and send all kinds of information and not just financial information.
How do the transactions take place?
For example, let us take bitcoin. In order to send bitcoins, you need to have an account on the bitcoin blockchain. The account is made up of two parts- A public key and a private key. These keys are a long random combination of numbers and letters. The public key is like an ID to which the cryptocurrencies are sent. A private key is like a password that is used to authorize the transaction.
Once the transaction takes place, it is broadcasted to and received by every computer connected to the global blockchain network. Once the transaction is verified to be authentic, people called ‘Miners’ step in. Miners have two crucial functions:
1) First, they group the authenticated transactions into blocks.
2) Then add these blocks to the official public ledger.
Creating these blocks and adding them to the public ledger take a great deal of time, energy, and computational work. However, due to all that hard work, when each block is added, the miner is rewarded with newly generated bitcoins. That is their incentive.
Each block added to the chain is permanently linked to the ones added before that block so that no one can go back into the ledger and add a fake transaction. Thus, the chain is almost unbreakable. So, they are a chain of blocks, after all.