The hype over Bitcoin has brought interested parties into blockchain, but what exactly is blockchain?
Table of Contents
- What is Blockchain?
- Understanding blockchain: database
- Understanding blockchain: Structure
- Blockchain For Dummies
- Blockchain Technology and Cryptocurrency
- Blockchain Wallet
- How blockchain wallets operate
- Security of a blockchain wallet
Unless the reader has been living under a rock, the chances are that everyone has heard of cryptocurrency and its current popularity in the financial world. Cryptocurrency has gotten everyone interested in it, no matter the demographic. Young and old, rich and poor, serious investors and casual investors - almost everyone has heard of these seemingly impossible success stories coming stemming from cryptocurrency.
It is understandable that every aspiring investor now has an interest in this emerging digital asset. Those interested have almost certainly come across the term "blockchain" regardless if they had performed only surface-level exploration into the topic. The chances are that this term has popped up numerous times without ample explanation of what it is or what it does. It can only be inferred that it is concerned with cryptocurrency as they are almost always in tandem. It is possible to be aware of blockchain technology, but understanding it is an entirely different operation.
Unless extensive research and tracking of banking and investing have been performed, it would not be easy to understand what a blockchain is and its relation to cryptocurrency. This article serves as an educational guide for those interested in learning more about this emerging record-keeping technology behind the most prominent financial network in recent history. Technical analysis will be provided to understand the technology and its uses, but it will also be explained in a fashion that can be understood by all.
What is Blockchain?
Blockchain technology is quite complex and intricate. It needs to be as its security is of significant importance in its field of finance. While the technology itself is complicated, the core concept of blockchain technology is actually quite simple.
Understanding blockchain: database
To fully understand what a blockchain is, it is essential first to grasp what a database is in banking and investments. A database can be explained as a collective of information. It is information that is stored electronically in a system of servers. What this does is create a neat method of organized data that allows for quick functionality and searching capabilities.
A database differs from a personal collection of information such as a spreadsheet in that it spans large groups of people. They are designed to house information for thousands and millions of users. Databases are stored on a large chain of very powerful computers. It takes high specifications to keep and utilize these large amounts of data. These collections of powerful computers form what is called a server, and businesses and organizations usually own these. A blockchain is a type of database used in cryptocurrency.
Understanding blockchain: Structure
Blockchains differ from standard databases in the way that they store data and information. Blockchains house data and collect them in groups. These groups are called blocks. A single block has a specific capacity in terms of storage. It means that only a certain amount of information can fit within a single block in the blockchain. When a single block is filled with data, it is then linked together with other blocks creating a chain of information hence the name "blockchain."
In a regular database, information is structured into tables. This structure is the reason it is often compared to spreadsheets. A blockchain, however, is structured into clumps chained together. What this creates is a decentralized chain of data that flows in an irreversible timeline. In a standard database, the information added could change or be altered in some way. In a blockchain, once a block has reached its capacity of information, it is set in stone in the chain. Every individual block in a blockchain has an exact timestamp. This nature of the blockchain is what makes it so suitable for cryptocurrency, and that will be explained in more detail further on.
Blockchain For Dummies
For those who are still confused about what a blockchain is, it helps to visualize the process. Imagine the blockchain as a sorting factory for information. Information comes into the factory for the factory workers to sort out. The workers then place the data into boxes. Boxes can only hold so much data. Once a single box is filled, it is then placed onto a conveyor belt with the other boxes. It is also stamped the exact moment it is placed onto the conveyor belt. In this factory, the boxes are the blocks, and the conveyor belt is the chain. The factory and its workers are the collection of powerful computers, otherwise known as the servers.
Blockchain Technology and Cryptocurrency
Blockchain technology is almost always spoken in tandem with cryptocurrencies, NFTs, and the like. This relation to them is because they all operate on a blockchain. When cryptocurrency transactions occur, they occur and are recorded onto a blockchain. As mentioned earlier, this is because of how permanent and secure blockchain technology is, which makes it perfect for cryptocurrencies and NFTs.
When cryptocurrency transactions are made, they follow a specific process before being completed and added to the blockchain. The process is as follows:
Stage 1: new transaction
Whether one is purchasing a cryptocurrency directly or through a cryptocurrency exchange, all transactions are entered as data into the servers.
Stage 2: scattered
The data from the entered transaction is then transmitted to a network. This network is peer-to-peer, which essentially means it is passed around from computers and scattered across the globe.
Stage 3: validation
The peer-to-peer network of computers passes the transaction around and solves the necessary equations on it. What this does is validate the transactions. Once the equations are solved, the transaction is confirmed sent on its way.
Stage 4: blocks
Blocks that have had their validity confirmed are then clumped together and placed in blocks. As mentioned earlier, a block can only contain a certain amount of information, making each transaction and block unique.
Stage 5: blockchain
Once the transactions have been grouped together and sorted into blocks, they are then placed into the blockchain. They are chained together and create a timeline of all transactions made. The moment they are entered into the blockchain, the transactions are permanent and can no longer be altered. Its history is forever a part of the cryptocurrency timeline.
Stage 6: completion
Once the blocks are entered into the blockchain, the transaction is realized, and thus it is irreversible. Completed cryptocurrency transactions are done on the blockchain because of this as it is secure and unalterable.
The largest cryptocurrencies operate on a decentralized network of blockchains. As is the case with any database, cryptocurrencies need an extensive collection of servers to store all the transactions being made in the blockchain. For a typical database, all of these computers that form a server would be located in one building where they are maintained and operated. It allows the owner of that database to freely make use of and alter any information needed in the servers. Cryptocurrencies, however, are decentralized, and the computers that make up the servers are operated by different individuals around the world.
Companies often own servers where they store all the necessary data that they need. They may utilize thousands of computers to achieve what they need. As mentioned earlier, these are often housed in one single building, which only the company has access to. In the case of cryptocurrencies, imagine these thousands of computers that make up a server are scattered throughout the world. Each individual computer houses a record of the cryptocurrency's blockchain and is called a "node."
A cryptocurrency blockchain is decentralized in that its serves do not exist in one centralized location. Therefore, cryptocurrency transactions are not owned or operated by any one entity and are instead done so by every individual who takes part in them.
Each node in a blockchain possesses a complete record of the data in the blockchain. If one node were to have an error, then the other nodes would be able to serve as a reference point to update the node's information. It makes it even safer than a traditional database that can get severely impaired if anything were to happen to its centralized servers. Every node possesses the history of all transactions made in any one particular cryptocurrency blockchain.
It also serves to make the blockchain unalterable, as any node in the network can refute any discrepancies made. If one node in the blockchain were to tamper with the cryptocurrency's transaction history, then the other nodes in the network will instantly cross-reference each other to find the source of the differing information. As previously stated, a blockchain is a permanent and irreversible timeline of data. This decentralized system allows for it to remain in this way, and it is a large part of why cryptocurrency operates on this technology.
However, it does not mean that cryptocurrency blockchains can not be updated whatsoever. It just means that they can not be altered by any one individual. If the vast majority of the decentralized network were to agree on the changes, then the respective nodes would promptly update themselves to match the new information. What this does is that it ensures the changes are completed for the majority and not the minority of nodes.
A major gripe with the financial world is that there is a lot of hidden information that can not be seen by the public. "Insider information" has become a major asset in trading and investing. In cryptocurrency, however, the blockchain operates in a manner that is transparent because it is decentralized.
As discussed earlier, each node of a cryptocurrency blockchain has complete information on the transaction history of that cryptocurrency. Because of this, anybody can view the history of the blockchain if they have a node or have access to one. Each node is updated regularly, so it is up to date with everything occurring. It allows anyone around the world to properly track the cryptocurrency they are interested in.
Blockchain wallets are essentially digital wallets used in cryptocurrency transactions. These digital wallets allow their owners to store and use their chosen cryptocurrencies. What this means is that blockchain wallet owners can transfer their cryptocurrencies around and convert them to other currencies based on their current market value. Each individual wallet is secure and unique to its owner meaning that it can not be replicated or duplicated.
How blockchain wallets operate
Blockchain wallets operate by sending requests to third parties. For example, if you want to purchase a specific amount of a specific cryptocurrency, then the blockchain wallet will send a request to your chosen exchange to supply your wallet with your desired cryptocurrency. This system then generates a unique address that is usually in the form of a QR code. All the financial information of the transaction is stored in this barcode so that it may be viewed by devices.
Different addresses are created every time a blockchain wallet makes a request. Users can also send other wallets to cryptocurrencies using these unique addresses. It is a process similar to the famous digital payment websites such as PayPal and Payoneer. The difference with these blockchain wallets is that they operate using cryptocurrency instead of using traditional currency.
Blockchain wallets also allow users to engage in asset swapping. This term means that users can change their cryptocurrency being held in their wallets for another cryptocurrency. The exchange is done based on the market value of the two cryptocurrencies being swapped. It allows keeping the security of the blockchain network when transacting within the wallet.
Security of a blockchain wallet
As with anything related to finance, security is an utmost priority. Compromised accounts can cost users all of their cryptocurrency within their wallets. Blockchain wallets feature several layers of protection to ensure that they are safe and secure for users. First of all, all blockchain wallets have a password that is created by the user. Secondly, many blockchain wallets utilize a mnemonic seed. It is essentially a random string of words that are unique to a blockchain wallet. They are impossible to brute force or guess using software and computers. Different blockchain wallets also utilize different security methods, such as regular face and ID verification.
It is important for users to take the security of their wallets seriously. Many blockchain wallets recommend storing copies of the user's password and mnemonic seed on a physical piece of paper and storing it somewhere safe. The servers that these blockchain wallets use do not store these security measures, which means that only the owner has access to them. Furthermore, there is the risk of a user getting hacked. It is because of this that it is recommended to store copies
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