How does Blockchain work?

5 min read

Picture a chain you might use for a ship’s anchor. But in this case, every link on the chain is a chunk of information that contains transaction data. At the top of the chain you see what happened today, and as you move down the chain you see older and older transactions. And if you follow it all the way down to the anchor sitting at the bottom of the harbor? You’ll have seen every single transaction in the history of that cryptocurrency. Which gives the blockchain powerful security advantages: it’s an open, transparent record of a cryptocurrency’s entire history. If anyone tries to manipulate a transaction it will cause the link to break, and the entire network will see what happened. That, in a nutshell, is blockchain explained.

  • Another way people often describe the blockchain is that it’s a ledger (sometimes you’ll hear the terms ‘distributed ledger’ or ‘immutable ledger’), that is similar to the balance sheet of a bank. Like a bank’s ledger, the blockchain tracks all the money flowing into, out of, and through the network.
  • But unlike a bank’s books, a crypto blockchain isn’t maintained by any individual or organization, including banks and governments. In fact it isn’t centralized at all. Instead, it is secured by a large peer-to-peer network of computers running open-source software. The network is constantly checking and securing the accuracy of the blockchain.
  • Where does new cryptocurrency come from? Every so often – around every ten minutes in the case of Bitcoin – a new chunk of transaction information (or a new block) is added to the chain of existing information. In exchange for contributing their computing power to maintaining the blockchain, the network rewards participants with a small amount of digital currency.
  • A crypto blockchain is distributed across the digital currency’s entire network. No company, country, or third party is in control of it; and anyone can participate.
The network is constantly checking and securing the accuracy of the blockchain.
Key question

How do you send and receive money over a blockchain?

The cryptocurrency network assigns each user a unique ‘address,’ which is made up of a private key and a public key. Anyone can send you money via your public key, which is akin to an email address. When you want to spend your money, you use your private key, which is basically your password, to digitally ‘sign’ transactions. The easiest way to manage your cryptocurrency is via software called a wallet, which you can get via an exchange like Coinbase.

Who invented the blockchain?

A person or group using the name Satoshi Nakamoto published a whitepaper online explaining the principles behind a new kind of digital money called Bitcoin in late 2009. Every cryptocurrency since is an evolution of the ideas laid out in that paper.

  • Nakamoto’s goal was to create digital money that would make online transactions between two strangers anywhere in the world possible without requiring a third party like a credit card company or a payment processor like Paypal in the middle.
  • This required a system that would eliminate a thorny issue called the ‘double spending’ problem, where a person might use the same money more than once. The solution is a network that is constantly verifying the movement of Bitcoin. That network is the blockchain.
  • Every Bitcoin transaction is stored and verified by a global network of computers beyond the control of any person, company, or country.
  • The database that holds all of that information is called the blockchain. Bitcoins are ‘mined’ via that huge, decentralized (also known as peer-to-peer) network of computers, which are also constantly verifying and securing the accuracy of the blockchain. In exchange for contributing their computing power to the blockchain, miners are rewarded with small amounts of cryptocurrency.
  • Every single bitcoin transaction is reflected on the ledger, with new information periodically gathered together in a “block,” which is added to all the blocks that came before.
  • The miners’ collective computing power is used to ensure the accuracy of the ever-growing ledger. Bitcoin can’t exist separately from the blockchain; each new bitcoin is recorded on it, as is each subsequent transaction with all existing coins.
In exchange for contributing their computing power to the blockchain, miners are rewarded with small amounts of cryptocurrency.
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