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What is blockchain and how does it work?

Today, virtually everyone knows cryptocurrencies, but only some know what Blockchain is. Is it a cryptocurrency? What is the connection between Blockchain and cryptocurrencies? And why are there those who perceive blockchain as something revolutionary and groundbreaking?

What exactly is a blockchain? There are many lessons and characteristics on the Internet, so let us go through them briefly.

You can think of Blockchain as an online book of accounting records and a specific type of database. However, unlike conventional databases, this database is not centralized, but quite the opposite - decentralized. This means that it has no central administrator and is located on a large number of computers all around the world. A blockchain is often referred to as a distributed database (imagine, for example, a huge Excel spreadsheet), in which all the records are stored forever. An even better analogy, however, is the endless book of accounting records .

However, neither example explains by far what makes the blockchain so unique. In fact, Blockchain is not so much a completely new revolutionary technology as it is often said - all the elements it uses, i.e. the Internet, cryptography, and the transmission protocol, have been with us for decades (cryptography even longer). So Blockchain is not revolutionary because of its state-of-the-art innovative technologies, but rather because of the way it combines hitherto incompatible technologies . We can use the same example in the case of the Internet and mobile phones. They had worked separately for many years before, but then a turning point came and the Internet began to be part of mobile phones, as it is today.

So what makes it different?

Currently, the so-called centralized database model is what we are used to. This means that you have one large data center with a huge number of hard drives and a fast connection, through which a large amount of information constantly flows. The problem with this approach is obvious. Destroy the data center and you will lose all the data. An example is a bank transaction. Even banks use a lot of data and have to mark their entire money flow. If I want to send money from my account, it must be verified and approved by the bank. Our finances are therefore centralized because without a bank (data center) we will not carry out any transaction.

Simply put, a blockchain is a very specific form of a database . It is distributed, does not have a central administrator, can be read by anyone, but can only be edited after all its participants have agreed to. This agreement (consensus) is created through the voting of financially motivated network participants (at least in the case of a public blockchain because there are other concepts). Thanks to this, it is possible to securely and permanently store data or transactions without the need for central supervisory authority, therefore there is not a single easily vulnerable link in the whole chain.

Blockchain and cryptocurrencies

So, blockchain is not a cryptocurrency, but a technology on which cryptocurrencies work. For example, if I want to send 1 bitcoin, blockchain will play the role of a bank. The first person to use blockchain together with cryptocurrencies was Satoshi Nakamoto . Up to this day, the true identity of Satoshi Nakamoto remains a mystery. He created Bitcoin - the first cryptocurrency in the world to use blockchain technology. Figuratively speaking, the blockchain is a kind of a godfather of Bitcoin and all other cryptocurrencies. At the moment, Bitcoin is the most valuable cryptocurrency in the world and has the largest market capitalization. If you do not know what Bitcoin is, I recommend you read the article: Do you know what Bitcoin is and how cryptocurrencies work today ?

Can you imagine Bitcoin running on a centralized database? Surely, it could work, there is no doubt, but probably no one would want it, so it would have no value. If any clerk could freeze your bitcoins or remove them from your account at the instigation of the state or the police, it would render it useless. In the case of Bitcoin, blockchain, therefore, replaces the central authority - the bank. Until 2008, there was no way to carry out financial transactions without a central point. Blockchain together with cryptocurrencies brought an alternative.

Why is blockchain revolutionary?

It is safe
  • - There are no human errors because no one controls or influences the blockchain. No one can edit anything retrospectively.
  • It is decentralized
  • - Blockchain has no center and works thanks to the users themselves; so-called peer-to-peer.
  • It is transparent
  • - Everything on the blockchain is transparent and easy to trace
  • It is secure
  • - All data is secure thanks to encryption by a hashing algorithm.
  • Falsifying blockchain entries is very difficult, if not impossible.
  • Jakub is a crypto trader and founder of Trader 2.0 project, which helps hundreds of traders from central Europe to understand cryptocurrency trading and its challenges. Jakub not o...

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