How Does the Blockchain Work? Pt. 1

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If you really want to get into the blockchain and cryptocurrency world, I would highly recommend that you start your journey by reading these two white papers: Bitcoin: A Peer-to-Peer Electronic Cash System and Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform — and then read them again, and again.

If you’re like many people asking questions such as: “I have an idea and I want to know if my project is suitable for a blockchain,” read those two papers, plus How to hire a blockchain developer.

I wish you all the best on your journey. Let’s take a look at the blockchain specifically.

How Does the Blockchain Work?

Blockchain is a hot topic around the world these days, yet for many, the technology remains an elusive concept. But it doesn’t have to — the concept is simple once you get your head around the architecture and theory of basic cryptoeconomics. When you do have your “a-ha” moment, the world will never seem the same to you again.

This blockchain basics guide is designed to deliver a clear, non-technical introduction to one of the most transformational and misunderstood technologies of our time. If you want to know what blockchain technology is, how it works, and its potential impacts, without all the technical lingo, then this post is for you.

A Short History of Transacting Money

Historically, when it comes to transacting money or anything of value, people and businesses have relied heavily on intermediaries like banks and governments to ensure trust and certainty. [1] Middlemen perform a range of important tasks that help build trust into the transactional process like authentication and record keeping. [2]

The need for intermediaries is especially acute when making a digital transaction. Because digital assets like money, stocks and intellectual property are essentially files, they are incredibly easy to reproduce. This creates what’s known as the double spending problem (the act of spending the same unit of value more than once), which until now has prevented the peer-to-peer transfer of digital assets. [3]

But what if there was a way of conducting digital transactions without a third party intermediary? Well, a new technology exists today that makes this possible. But before we dive into the mechanics of this revolutionary technology, it’s important to provide a little context.

Blockchain vs Bitcoin: What’s the Connection?

Bitcoin first appeared in a 2008 white paper authored by a person, or persons, using the pseudonym Satoshi Nakamoto. The white paper detailed an innovative peer-to-peer electronic cash system called Bitcoin that enabled online payments to be transferred directly, without an intermediary. [4]

How the Blockchain Transfers Value via

While the proposed bitcoin payment system was exciting and innovative, it was the mechanics of how it worked that was truly revolutionary. Shortly after the white paper’s release, it became evident that the main technical innovation was not the digital currency itself, but the technology that lay behind it, known today as blockchain.

Although commonly associated with Bitcoin, blockchain technology has many other applications. Bitcoin is merely the first and most well-known implementation. In fact, Bitcoin is only one of about seven hundred applications that use the blockchain concept today. [5]

[Blockchain] is to Bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one. — Sally Davies, FT Technology Reporter [6]

One example of the evolution and broad application of blockchain, beyond digital currency, is the development of the Ethereum public blockchain, which provides a way to execute peer-to-peer contracts. [7]

What’s Under the Blockchain Hood?

Simply put, a blockchain is a type of distributed ledger or decentralized database that keeps continuously updated digital records of who owns what. Rather than having a central administrator like a traditional database, (think banks, governments and accountants), a distributed ledger has a network of replicated databases, synchronized via the internet and visible to anyone within the network. [8]

Blockchain networks can be private with restricted membership similar to an intranet, or public, like the Internet, accessible to any person in the world. [9], [10]

When a digital transaction is carried out, it is grouped together in a cryptographically protected block with other transactions that have occurred in the last 10 minutes and been sent out to the entire network. Miners (members in the network with high levels of computing power) then compete to validate the transactions by solving complex coded problems. [11] The first miner to solve the problems and validate the block receives a reward. In the Bitcoin blockchain network, for example, a miner would receive Bitcoins.

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