Blockchain is the technology that makes cryptocurrencies possible.
- A blockchain is like a public ledger that records transactions and tracks a history of how information moves from person to person.
- Blockchains aren’t controlled by a single person, instead they are ‘decentralised’, because the information is stored by lots of different people at the same time.
- Their most common practical use is in cryptocurrency, where a blockchain replaces the role that would usually be played by a bank.
What is a blockchain?
A blockchain stores information online and links it together in chronological order. Once a piece of data has been added, it cannot be changed or removed, and while the actual information stored can be anything, blockchains are best known as the technology that allows cryptocurrency to work.
The best way to understand a blockchain is to think of it like a digital accounting book, where each new piece of information is added on a new line. Except, rather than an accounting book which might be controlled by a bank manager, on a blockchain every new transaction is added automatically, without being verified by any central authority.
This can sound a bit strange at first but in reality it’s quite straightforward. Say you were to send £5 to Steve; the transaction would be recorded on a blockchain and if Steve then wanted to send £5 to Jane, the blockchain would be able to check itself to make sure he has the money to do so.
By removing the middlemen, blockchain technology allows people to send information to each other directly, much faster than would otherwise be possible. It also removes the ability of powerful organisations to act as gatekeepers and prevent the flow of that information. This distribution of control over the network is known as decentralisation.
That leads into the other key feature of a blockchain, which is that there isn’t just one record of it, held in a single place. Instead, it’s more like a shared Google file where the data is hosted by lots of different people and constantly synchronises itself to create one up to date, accurate record.
What is a ‘block’ in a blockchain?
A block is a group of transactions that are added to a blockchain all at once. To continue with the accounting book analogy we used earlier, a block is like a page of the book. Each block is a new page that’s linked to the previous one and will be connected to the next one to create a chain.
Once a block is added to the chain, the information within it cannot be changed. Again, it’s like our accounting book: if you went back to change some numbers on a previous page then all the transactions after it would no longer be valid.
When was blockchain technology invented?
The rough idea of using cryptography (digital encryption) to create a reliable record of information was first outlined in a 1991 research paper called ‘How to Time-Stamp a Digital Document’. However, Bitcoin’s release in 2009 is the point at which it became a more mainstream idea.
Bitcoin developed the concept so that it was able to secure a financial network. Since then, many other cryptocurrencies have sprung up that are built on blockchain technology. Some of those, like Ethereum, have taken the technology a step further, to make it possible to manage more complex and detailed information on a blockchain.
What problem does blockchain technology solve?
Blockchain technology provides a solution to what is commonly known as the ‘double-spend problem’. With normal cash or currency transactions, it’s quite easy to make sure people can’t spend money they don’t have. The issue is more complicated with cryptocurrency, where everything is digital and there is no entity overseeing it.
By storing a complete record of all transactions, a blockchain prevents anyone from spending money twice. Every time someone pays another person, the details are added to the blockchain so that they can’t then go to anyone else and try to pay them with the same money. Without this technology, there would be no way for cryptocurrency to exist.
Where can I learn more?
For more information about blockchains, and other key cryptocurrency concepts, check out our full course page on how Bitcoin works. To learn more about investing in different coins, head to our in-depth hub page.
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