How Does Blockchain Technology Work?

How Does Blockchain Technology Work?

The blockchain is certainly one of the best new technologies since the invention of the Internet. It allows us seamlessly exchange currency without any centralized authority.

The most well-known and widely discussed application of the blockchain technology is called Bitcoin. Just like a Dollar (USD), Euro (EUR), or Chinese Yuan (CNY) Bitcoin can be used to exchange currencies, products or services. Considering the popularity of Bitcoin, let’s use it as an example of how this technology works.

Our top trading bots

“At its core, bitcoin is a smart currency, designed by very forward-thinking engineers. It eliminates the need for banks, gets rid of credit card fees, currency exchange fees, money transfer fees, and reduces the need for lawyers in transitions… all good things.”

Peter Diamandis

Founder and chairman of the X Prize Foundation

What is a Distributed Ledger?

Imagine that one bitcoin is a single unit of the Bitcoin (BTC) digital currency. Just like Euro, it does not have any value itself. And to keep track of the number of bitcoins, there is a distributed ledger that can record transactions between two parties.

This file is not kept in any central server, such as a bank or a single data center. The ledger is distributed across the world via a network of computers, which represent a “node” and keeps a copy of a ledger file.

As you can see in the table above if Brian wants to send Bitcoins to David, he announces this message to the network showing that amount of Bitcoins in his account should decrease by 3 BTC and the amount of David’s account should increase by the same amount. Each node in this network will receive the notification and apply a requested transaction to the ledger, thus keeping the account balances updated.

How to Make Transactions on the Blockchain?

If you want to perform transactions on the blockchain, you need to create a wallet. This is a program or an app that allows you to buy, sell, and exchange bitcoins. Taking into account that you are the only person who can dispose of your assets, each wallet is secured by a cryptographic method that uses an exclusive combination of two different keys: a private and a public one.

If a message is encrypted with a public key, you are the only one who can decrypt the message - as no one else knows your private key. Otherwise, if you encrypt your message with a private key, only the paired public key can be used to decrypt it. Using our example above, when Brian wants to send bitcoins, he broadcasts a message protected with a private key of his wallet and no one except for him knows a key to unlock his wallet. Each node can make sure that the transaction comes from Brian as they can decrypt the transaction request with the public key of his wallet.

How to Make Sure that No One Can Interfere in Your Transaction?

When you encrypt the request with your private key, you are simultaneously creating a digital signature that is used to double-check the authenticity of this transaction. This digital signature is composed of a private key and a transaction request which make it a unique combination that cannot be used for other transactions. If you change just one character in the transaction, the digital signature will change that’s why potential hacker can modify your request or the number of Bitcoins you are sending.

To send bitcoin, you have to prove that you are the owner of the private key as you need to use it to encrypt the transaction request message. Note that you can never reveal your private key since you broadcast the message.

If you want to perform transactions on the blockchain, you need to create a wallet. This is a program or an app that allows you to buy, sell, and exchange bitcoins.

As the Bitcoin network is open-source, anyone with a laptop and internet can operate transactions. If any mistake appears in the code used to broadcast a request message, the associated currency will be lost forever. Since the network is distributed there is no customer service that could solve this problem. That’s why, if you decide to transact on the Bitcoin network, we advise that you use only the open source and official Bitcoin wallet and keep your passwords in a safe place.

The Advantages of Blockchain Technology

Now you have an understanding of how blockchain technology works, let’s see why it is so attractive to users.

Using blockchain technology has several obvious benefits:

  • You have a complete control of the assets you own. No third party controls this value and limits your access to it.
  • The cost to make a transaction is very low no matter where it happens. It allows micropayments.
  • It takes just several minutes to transfer a value.
  • As anyone can verify the transaction at any time, the whole process is considered transparent.

The Challenges of Blockchain Technology

However, blockchain technology has several challenges:

  • There is an option to send and receive transactions anonymously. On the one hand it guarantees a certain level of privacy, but on the other hand, it can cause the illegal activity as no centralized institution can keep track of the user's identities.
  • In spite of growing popularity of bitcoins, it is still useful when it comes to buying actual goods and services. However, this can change in the nearest future.
  • Bitcoin price just like a price of any other currency is very volatile and can be affected by significant events, or news in the industry.
  • Although security is not a weak point of the blockchain, the technology is still in its infancy. New tools are developed every day to improve the stability and security.
Essential 2021 Crypto Trading Bots For You To Operate With
Automated Bitcoin trading is getting consciously popular among crypto investors and independent traders. Although, are there any criteria to identify a...
Questions, Issues, And Procedures Of Crypto Wallets Explained
The world of crypto finance is growing rapidly with every single day and new wallets keep appearing. If you want to buy crypto, you need to know how to...
Studying Time: Top 10 Books About Bitcoins and its Ilks
You live, and you learn, – teaches the old saying. It remains relevant especially in the era of emerging technologies, and it is not an exception when...
7 Things You Can Do with Blockchain
According to Gartner’s Hype Cycle 2017, blockchain technology is among those that promises us a bright future. By this stage, everyone has heard about...
How Do I Use Ethereum?
The very first question about dealing with Ethereum for newbies is "How do I buy ETH?" or " How to use Ethereum for trading or investing?" How to...
What is Blockchain Technology and How Does it Work?
That’s why imagine blockchain as a technology that keeps track of every digital transaction that happens online, whether it is an exchange of goods and...
The Difference Between Public, Private, and Permissioned Blockchain
You have presumably been there: a job interview, with a panel of interviews sitting opposite to you thoroughly scrutinizing your resume. What’s more, you...
How and Where Can I Buy Bitcoin in the UK?
Many people interested in becoming a part of the cryptocurrency market often ask questions such as "Where to obtain cryptocurrency in Europe?" or "How...
Major Services that Accept Bitcoin Payments
As the most powerful cryptocurrency is slowly taking over the online market, there are many merchants, small shops, big online stores, and retailers who...
What is the Difference Between Blockchain and Database
For many of those wish to know the difference between Blockchain and a database, it is best to start by simply explaining that they are different in design,...
How Can You Spend Your Bitcoins Online?
The most popular digital currency ever, Bitcoin is apparently slowly taking over the modern day market with its sky-high growth. A significant number of...
Ethereum Forecast for 2018 - How Will Ethereum Scale?
It is just a month left to 2018, and it is already possible to predict the near future regarding the price of Ethereum . It is based on the data analysis...
Can Blockchain Technology Change the Finance World?
As the most innovative technology of modern days is carving its path into the world of business, finances, and various types of industries, many pose the...
Bitcoin Mining Pools – the Way of Earning Money in the 21 Century
The twenty-first century dictates the new lifestyle rules for people all around the world. Nobody wants to leave the house and work for getting money....
How Does Bitcoin Cloud Mining Work?
Growing number of people wish to invest their assets in Bitcoin mining without involving too much in managing their hardware. Earning the coins by using...