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What is Blockchain and How does it Work?

You might have heard of blockchain in the news or among your friends and most definitely in the same sentence as Bitcoin. But what is blockchain really?

To understand blockchain, let’s first differentiate between Bitcoin and blockchain. Bitcoin is a digital currency that can be used like money exchange for goods and services. Unlike traditional currency, Bitcoin is not controlled by a central authority. 

Blockchain, on the other hand, is the underlying technology that Bitcoin is built from. It is the rules and code of blockchain technology that allow Bitcoin to be spent like money.

A blockchain is a type of database that records the transactions and account balances, like Bitcoin, in “blocks”. On the Bitcoin network, for example, blocks occur every 10 minutes and include the data of transactions within them. Each block is linked to a previous block, creating a “chain” of records.

An entire chain of records is kept and stored across multiple computers, called miners or nodes. Unlike a traditional database, however, data on the blockchain cannot be deleted, changed, or tampered with because of distributed ledger technology (DLT). With DLT, this chain of records (a ledger) is distributed among the computers in the network, maintaining one source of truth of transactions and account balances.

Although Bitcoin is only one application using blockchain technology, there are many others like Ethereum, Cardano, and over 10,000 more cryptocurrency and token projects.

What is the Bitcoin Blockchain?

When you perform a transaction on a blockchain like sending Bitcoin from one person to another, that transaction is added to a block. Data such as how much Bitcoin is sent, which account the Bitcoin was sent from, and who the Bitcoin is sent to are added to the network.

As mentioned above, new blocks are created every 10 minutes on Bitcoin’s blockchain. These blocks of transactions are validated by “miners”.

What are Bitcoin Miners?

Miners are anonymous individuals who run computer hardware and software that solve complex cryptographic math problems. They are necessary to keep the blockchain running because they add new blocks of data to the blockchain. These miners are distributed across the globe and can be turned on or off anytime. These properties allow for a decentralized structure of computers all working to secure the network.

When a Bitcoin transaction occurs, it is placed in a “pool” of other transactions called a mempool. A mempool is the collection of transactions waiting to be “mined” and verified by the miners.

However, not all transactions can be confirmed in the next block. Bitcoin accounts that pay a higher fee for their transaction are prioritized first until the whole block is filled.

Miners (or a collection of miners) must solve a complex math problem to secure the transactions in the mempool. Miners compete with one another, every 10 minutes, using their computers to solve each block. The first miner (or group of miners) that solves the problem for each block is rewarded with Bitcoin. This reward incentivizes miners to keep the network running.

When a block is solved, it is “chained” to the previous block and the data shared across the entire Bitcoin network. The block and transactions become public and are available to see by anyone on a blockchain explorer.

Why is Blockchain Important?

A blockchain eliminates the middleman when processing transactions and provides a new way to send value from one person to another. Open source code and rules govern how a blockchain operates without an intermediary. Central authorities are not required in a blockchain because value is transacted from person to person. Any single point of failure, either geographically or politically, is greatly reduced because of decentralization.

In addition to transmitting value, other types of projects are being created with blockchain techonology. A new wave of applications such as DeFi (decentralized finance), NFTs (non-fungible tokens), and many other projects are bringing more power to the people.