The world may soon run on blockchain — your crypto definitely does.
The world of crypto relies on blockchain technology. Cryptocurrency actually lives on it and it helps make your executed crypto transactions tamperproof. But what is blockchain?
In this article, you’ll learn about blockchain and how it functions. You’ll also follow a transaction through a blockchain and see what that means for the world of commerce.
Table of Contents
- What is Blockchain?
- How Does Blockchain Technology Work?
- What Are the Advantages of Blockchain Technology?
- Blockchains in the Real World
- Blockchain and Crypto
- Blockchain Communities
- How Do You Navigate a Blockchain to Buy or Sell Crypto?
What Is Blockchain?
Blockchain technology allows data to be entered and distributed in a permanent, irreversible way. Think of a blockchain like a piece of paper that records transactions — now imagine if you can only add content to the page, and there’s no option to edit or remove it.
Once each page is filled up, another page appears and gets stapled to the existing pages, forming a chain of pages.
Similarly, blockchains organize data into blocks. When a block is filled with data, a new block is created and irreversibly linked to the existing block(s), creating a permanent and unchangeable database of records.
In addition to centralized blockchains, there are decentralized blockchains that allow any eligible participant to access or add to the blockchain. There are also public and private blockchains.
Public blockchains are as they sound: open to anyone. Automatic validation policies and encryption keep transaction data safe. The more participants there are on a public blockchain, the more secure it is.
These blockchains are excellent for attracting large communities. With such active participation, they can foster innovation in services and assets that are traded on the blockchain.
Private blockchains, on the other hand, are often used by enterprises for specific tasks. They allow participation by invitation only.
Validation of identity may be automated, and not all participants have the same access to recording transactions. This can optimize performance for a particular task.
Often, blockchain is described as a “distributed digital ledger.” This highlights its accounting-like function, as well as the way most blockchains exist over a network of computers, making it very difficult for malicious actors to bring them down.
But, unlike any ordinary ledger, blockchains are not maintained by a single centralized authority. Their power comes from all participants having access to its records and the ability to add transaction data to the blockchain without the ability to alter or corrupt that data.
But how does a blockchain function as more than a glorified spreadsheet spread over a network of computers?
How Does Blockchain Technology Work?
Early concepts for blockchain technology have existed since the 1980s, but blockchain, as we know it today, was introduced by the individual or group known as Satoshi Nakamoto.
Bitcoin (BTC), widely regarded as the first modern cryptocurrency, also popularized the decentralized blockchain, which stores blockchain data across a decentralized network of computing devices, thus removing any single point of failure.
Let’s discuss a few important concepts that form the basis for blockchain technology.
In simple terms, hashing is an algorithmic function that takes an arbitrary amount of data and converts it into a fixed-size output of text called a “hash.” This step is critical to protect data from future tinkering or from revealing it to those without permission to see it.
The algorithm that does this is considered one-way: beginning with the same data, performing the hash function always yields the same result or hash. Trying to reverse engineer it — figuring out the original data from the hash — is next to impossible.
Hashing conceals critical personal data on the blockchain, as well as the digital signatures or keys required to authorize transactions.
Proof of Work and Proof of Stake
Next, blockchains function without centralized oversight. This means that validation of the accuracy of transactions must be by consensus. Two methods are most frequently used: proof of work and proof of stake.
Proof of work (PoW) requires an authorized blockchain participant to validate the transaction by solving a difficult math problem with highly intensive computing power. Correctly solving the problem earns a reward and allows a block to be added to the chain.
Blockchains that use proof of stake (PoS) employ a different approach. Instead of requiring the solving of a tough problem, they require a validator to have a significant stake in the blockchain, often in the form of cryptocurrency.
When participants in this consensus validation earn rewards — usually cryptocurrency tokens — their work is described as mining cryptocurrency.
How Transactions Work on Blockchain
Let’s follow a transaction through a hypothetical distributed blockchain to better understand how it works.
First, there’s the transaction.
Someone buys some goods for a set amount of money at a particular time. All the purchase data is requested as a transaction to add to the blockchain. A block containing the record is created — but not yet added to the chain.
Next, the block is sent to every node on the blockchain’s distributed computer network. That means all participants in the blockchain now have the same information. If someone in one node tried to alter it, it wouldn’t match all the others, immediately spotlighting the error.
The transaction is now validated via one of the two consensus methods described above — PoW or PoS. That validation work is rewarded, and the block is added to the chain.
Herein lies an interesting technique that keeps the blockchain accurate and immutable.
When a block is added, its hash is based on the hash of the previous block, which was based on the hash of the block before it. Therefore, all must sync. If a block is tampered with, its hash will not compute properly with the other blocks in the chain.
The transaction is complete once the validated block is added to the blockchain and the rest of the nodes in the network have been updated.
What Are The Advantages of Blockchain Technology?
Decentralized blockchains share the following positive characteristics:
- Increased transparency. As we mentioned above, sufficiently decentralized blockchains feature no central authority, instead relying on a peer-to-peer network of computing devices to verify transactions. In addition, many blockchains are open-source, allowing anyone to view their source code.
- Enhanced security. Blockchain data cannot be edited, removed, or manipulated without consensus from the majority of the network. Therefore, transactions cannot be duplicated, reversed, or deleted.
- Improved speed and efficiency. Data can be added, stored, and moved on the blockchain in a way that’s publicly verifiable — thus removing some intermediaries from the equation. Furthermore, smart contracts, or self-executing code stored on the blockchain, can automatically execute, verify, or enforce agreements between parties.
- Unrivaled traceability. Once data is added to a blockchain, it will remain there permanently as a proof-of-record, making blockchain technology a great candidate for improving supply chain traceability.
With all of these advantages, it’s not surprising that blockchains are being widely used. Chances are you’re benefiting from one or more without even realizing it.
Blockchains in the Real World
Blockchains are all around us. Supply chains are perfect candidates for their advantages.
Take fish, for instance: How do you know if the fish you’re buying is fresh — that its origin is as claimed?
Blockchain can enable this. All participants in a supply chain can have transparent, reliable records of what precisely happened at each step of the way — from the fishing boat to your restaurant plate or home freezer. Origin is pretty much guaranteed.
Blockchains are also used to secure medical data, track royalty payments for music, and process real estate transactions. They’re even being used to make voting results secure and tamper-proof.
But what’s all this have to do with cryptocurrency?
Blockchain and Crypto
As mentioned, crypto doesn’t reside in your pocket or even in your online brokerage account. It lives in a blockchain. In fact, each cryptocurrency has its own unique blockchain where it is the official currency for that particular blockchain.
Blockchains provide the perfect environment for crypto transactions. Their very nature allows transaction data to be cryptographically stored, protecting the personal information of all participants.
Blockchains also allow crypto transactions to take place without a third-party controller, such as a bank or other financial institution. This allows sellers to link with buyers anywhere in the world and execute a secure transaction without either knowing the other’s identity.
But more can happen on a blockchain than buying and selling crypto coins. Since the blockchain houses digital transactions — code — it also can host advanced programs such as smart contracts, enabling some contractual transactions to be automated.
Some blockchains can attract passionate communities that support them and the innovations being created on them. Take the Ethereum blockchain and NFTs, for example.
This relatively new innovation, known as a non-fungible token or NFT, has caused quite a splash because some digital art NFTs have sold for millions of dollars. They are basically digital assets that are wholly unique.
A single NFT can’t easily be replaced and contains a record of its authenticity. Currently, they are being used primarily for art, gaming assets, and music. But there are many digital creators experimenting with all kinds of uses for them.
While, technically, NFTs can exist on any blockchain, Ethereum has become the most popular one to host them. They spawn communities passionate about a shared interest — music, art, or fashion, for example.
How Do You Navigate a Blockchain to Buy or Sell Crypto?
What is blockchain? To sum it all up, Blockchain is a technology designed to be reliable, secure, and full of possibilities.
As it functions in the background, if you want to get into crypto, you don’t have to interact directly with blockchain tech. It will be there doing all the work while you decide what you want to buy and when.
All you have to do is research the various cryptos that are available — there are hundreds — and choose which one to purchase. Then, decide how to buy it.
Some major cryptos are directly available online; others are available through payment services.
One of the best ways to approach buying and selling crypto is to find a good crypto platform. These platforms allow you to access the crypto you want, have a way to store it, and take advantage of other services to round out your crypto experience.
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