What is Blockchain? An Introduction
|— You can think of blockchain as a digital replacement for banks, central banks and the state when it comes to crypto – blockchain is the management system that governs how crypto value can be created and used|
— Blockchain is a digital ledger of all transactions that have ever been made on a network – and since it is completely immutable, you can rely on it to keep track of exactly where your crypto – and everyone else’s – is
— The trustless nature of blockchain has enabled not just currencies like Bitcoin, but a booming new DeFi industry that is challenging traditional banking
Do your eyes glaze over when you hear the word blockchain? It’s time to overcome your frustrations and learn blockchain basics! No need to be a pro here, or deep dive into the technical details. To get on the crypto train, you just need to understand the overall idea. The rest will come naturally, with practice and curiosity.
What Is blockchain?
Remember in the previous article, we explained the primary purpose of crypto: it’s a digital currency allowing uncensorable peer-to-peer transactions without any third-party involvement. Well blockchain is the system that keeps track of where that digital currency is moving to.
Let’s put it this way – if cryptocurrency is the house, then blockchain is the foundation – you can think of it as the infrastructure of cryptocurrency. While fiat currencies have their own financial system for managing value securely, including banks, clerks, ATMs, banknote printing services and so on, crypto replaces all of this with blockchain networks, which are designed to move value around safely without any of these intermediaries.
Blockchain, crypto and Bitcoin – what’s the difference?
Blockchain, cryptocurrency and Bitcoin are closely related concepts. Indeed, the pseudonymous Bitcoin creator Satoshi Nakamoto actually created Bitcoin, the first successful cryptocurrency ever, and blockchain, i.e. the technology that supports it. However, while commonly mistaken for being the same, they are completely different topics that you must clearly understand and differentiate.
Let’s use a simple analogy. Websites are a well-known Internet application to share peer-to-peer information. Search engines are among the most common ways to use websites by facilitating access to them. Google is one of the most famous and used search engines. To some extent, blockchain, cryptocurrency and Bitcoin share a similar relationship: blockchain is a groundbreaking technology to stock and share peer-to-peer value and information online.
Why use blockchain?
In short, blockchain is a decentralized and public digital ledger that records any information – like financial transactions – in an anonymous and immutable way. Such groundbreaking features provide users with significant benefits :
- Because it is decentralized, there are no third parties involved: no banks, no cloudy actors, no administrator, no unexpected fees. Just you and your digital assets.
- As a public record, it provides transparency of all the transactions and allows traceability. While this can allow information counter-checking, it also makes falsifying information difficult.
- Information is recorded in both an anonymous and immutable way. It means that once data is added to the ledger, it cannot be removed or altered. Nor can it the provider be nominatively identified.
Put together, all these features make blockchain very hard or almost impossible to alter or hack. That is what makes blockchain technology so powerful. Besides, it provides us with major revolutionary advantages for countless applications with one same core principle: fostering the decentralization of traditional systems to give power back to the people. And this is exactly what cryptocurrencies aim to do with the traditional financial system.
How blockchain works (made quick and easy)
For cryptocurrencies, blockchain allows transparent, secured and anonymous peer-to-peer exchange of value at scale – free from the control of external parties.
Because the network is composed of multiple computers, which can be located all over the world and run by anyone with an Internet connection, it creates a decentralized and distributed validation process that cannot be impacted by any entity.
How a Blockchain Transaction Works
Let’s picture an actual succession of large blocks of stone. The hardest and strongest existing kind of stone. Say granite. The blocks are publicly displayed in a single file so heavy that their order cannot be changed. Each time a coin transaction is validated, it would be engraved forever on the last stone block of the chain.
What happens when Joe wants to send 2 coins to Jane?
First of all the previous stone blocks have to be verified. Since they constitute an unalterable track record of all the previous coin transactions. This is to be sure that Joe really owns these 2 coins. Let’s say he does, because he received them from Peter a few years ago.
Once validated, the engraving process can begin, adding a new stone block to the chain, executing the transaction and setting in stone the new situation: minus 2 coins for Joe and plus 2 coins for Jane. And voilà! And the best part of all this is that the process is totally autonomous; nobody, not a government, bank or hacker, can interfere in how you use your blockchain assets.
You Have The Power – And the Future is Bright
Well, you did it! You went through the blockchain thing! And hopefully, you now understand why it is so revolutionary, and so important.
And we haven’t even mentioned the incredible raft of innovation it has generated since its inception. Blockchain isn’t just about crypto – it also powers DeFi, dApps, games, NFTs, the Metaverse and more, all of which exist autonomously and are driven forward by the global blockchain community.
The possibilities are endless, and understanding how they work is crucial for getting the most out of blockchain, and understanding what the future holds for human beings. So stay informed and make sure you have a voice in our decentralized future.
Knowledge is power.
Trust yourself and keep on learning! If you enjoy getting to grips with crypto and blockchain, check out our School of Block episode about the eternal quest to get rich quick in crypto.