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How Blockchain Works An Easy-to-Understand Guide

The blockchain is one of the most complex, yet intriguing technologies to have come about in recent years. It’s a crucial part of cryptocurrencies like Bitcoin and Ethereum, and it has the potential to revolutionize how we store and transfer data in the future. In this article, we’ll explain how blockchain works at a high level without getting too technical. We’ll cover what the blockchain is, how it can be used to create digital identities, and examples of where you can already see it being used today.

Blockchain: what is it?

Blockchain is the technology that allows cryptocurrencies like bitcoin to exist. It’s a public ledger of all cryptocurrency transactions. Its decentralised nature means that it doesn’t rely on any banks or governments to function. It also means that it’s resistant to the old-fashioned types of fraud that come with data manipulation. In short, a blockchain doesn’t just store data.

It creates data! That data is then officially recorded on a shared database called blockchain, which is open to the entire world to access. Since anyone can create a block of data, anyone can later track its progress throughout the chain. The potential applications of blockchain are exceptionally numerous. Not all of these will be financial, we’ll just cover the most useful ones that are relevant for digital marketing right now.

How does blockchain work?

To understand what blockchain is and how it works, it’s useful to explore a simplified version of how it works. The top layer of the blockchain is the “miner” (think of them as central file official, tasked with validating transactions and verifying shared data). To add extra security, the protocol allows anyone to pay to add a certain level of security to the blockchain. Until recently you could pay as little as 10 cents. That might sound like a negligible amount, but if you think about things like your credit card or identity card, it’s gigantic.

Bitcoin, for example, is currently worth over $200,000 USD. Once the blockchain receives payment, it starts at the top of the blockchain and slowly crawls downward, parsing through the details of the transaction and, if it finds something relevant, adding it to the blockchain’s official ledger.

The features of creating blocks in the blockchain were originally created to support online currency trading (think of the bitcoin blockchain as a digital HTTP request to three separate websites). But more recently, blockchain has been adapted as a way of effectively recording data digitally (think of the blockchain ledger as a digital tape). A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a cryptographic hash of the previous block, a timestamp and transaction data. By design, a blockchain is inherently resistant to modification of the data.

“There was a man called Ned, who bought a house two years ago,” briefly stated the sellers’ agent from the sales closing. “And then one day he forgot to pay the electricity bill and the electricity unexpectedly went out for three days. Two days later, the power came back on, but Ned didn’t get back the full amount of the payment.” “Well, you’ve still got another three days before the end of the month, haven’t you?”, he asked in surprise. “No,” Ned stated, “but I could pay the remaining balance by next week.”

“Hmmm,” said the sales agent.

“Yes,” Ned responded, “I’d like to pay this amount by next Tuesday. But what if my electricity bill doesn’t drop any further?”, he asked the sales agent. “Then your best bet would be to give the remaining balance to the seller.”, said the sales agent. “How would I even do that?”, asked Ned. “By paying in advance when the amounts are higher.”, said the sales agent.

Ned quickly ran a transaction through the blockchain, this is to say that on the block with the purchase amount being $101, he continuously adds 1 unit of transaction data, which statistically is a 1 in 2 chance that the data will be 1.2 units higher than the previous block. After this, he adds a 1 in 67 chance that the block number will jump 6 numbers higher, another 1 in 6 that it’d jump 37 numbers higher, and so on.

What is a blockchain used for today?

A blockchain is a type of digital ledger that records transactions across many computers so that the record cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network. Basically it’s a list of transactions; a lot like a bank record. The blocks are the list of transactions and each block is linked to the previous block. No single computer could write the entire history of the blockchain since any one computer could only write a small portion of the data that is needed to complete transactions over the network.

 Just as in a bank record, these blocks are organized chronologically, denoted with unique names, numbers, and symbols (called “storage addresses”, “hash values”), and added to whenever certain conditions are met (called “mining”). Miners solving algorithms designed to be very efficient at unlocking these blocks spend their processing power to solve more and more math problems which are “mined”.

As more and more transactions take place, more and more storage addresses are added to each block. The more data is on a block, the more storage addresses can be written on that block. As the complexity of new blocks grows and grows, mining becomes more and more difficult. You need more processing power to solve those math problems, therefore you need to hire more and more specialized computing power to mine. In other words, the speed of processing computers increases as the number of transactions they are processing grows.

The rate at which that happens, however, is much slower than it was for computing just a few years ago. For this reason, I like to refer to the blockchain as a “chain.” The more blockchain-based solutions we have today, the faster technologies will grow, the slower they’ll grow. Over time, we are likely to see technology or companies that specialize in operating and managing these platforms grow in market share. There is a potential for these niche companies to become dominant players. Here’s a sneak peak of what the future of blockchain in web 3.0 .

How does the blockchain work for digital identities?

The blockchain is a kind of digital ledger that records transactions across many computers. It’s the technology behind cryptocurrencies like Bitcoin. But the blockchain can be used for more than just digital payments. It can also be used to prove ownership of digital identities. This guide will explain how you can use the blockchain for these various purposes.

For reference, here’s a figure of what a blockchain is:

In simple terms, blockchain is a ledger with transactions on it. Transactions happen when multiple computers (known as participants) upload information into the ledger and the information is added to the blockchain. Examples of blockchain include Ethereum, which has its own cryptocurrency (dBa), and Bitcoin, the world’s most well-known cryptocurrency.

So how does a blockchain work at a larger level?

For example, consider the following scenario:

You want to move your entire life savings $25,000 from your savings account into an online investing platform. After your $25,000 has been moved, you can sign on with a participating digital identity (e.g., your employer) and make a withdrawal from your digital wallet (e.g., Bitcoin). Your withdrawal request is written into the blockchain, and a record of this transaction is added to it. To protect the privacy of these sensitive transactions, not everything is public on the blockchain. Transactions often occur behind private (i.e., non-web-based) onion layers. At the top of the onion, only the transaction history is considered public, and it is not quite clear who made which transaction.

How does the blockchain work for cryptocurrencies?

The blockchain is what keeps track of the cryptocurrency and records how much of the currency is owned by each person. The blockchain is a long list of records called blocks, that are stored on many computers. Each block records some or all of the most recent transactions, and it also stores a code, called a hash, that enables the block to be quickly identified. The hash is the very basic skeleton of a code, and it represents the token given to a user when a specific block is created.

As a user, you can earn a token called a bitcoin by validating the data stored within the blockchain. That data consists of standard types of information (like emails, addresses, and payments) plus bits that encode additional information like a message and the total amount of bitcoin. For example, if you have a message saying: Help me out! I need a bitcoin

Under the hood There are two parts to blockchain technology:

The blockchain itself, and the cryptocurrency used with the blockchain. The result of both of these is something called a cryptocurrency wallet. Just about any computer or smartphone you have, including the iPad, can generate a unique private key by copying the code needed to access a specific block or data within the blockchain. The private key and the address that the key gives make up a piece of data called a cryptocurrency address.

The concept behind a cryptocurrency address is that you can quickly send money anywhere in the world using just your private key no personal information required. How have apps raced ahead of cryptocurrency? Developing an app is 2.5X cheaper than developing a cryptocurrency wallet. Why not just leverage the cheaper option? Well, the problem with developing an app is that it must run natively on iOS or Android. Developing a native app on an Apple app store will be slow, and you’ll likely be limited to using 60%, 70%, or even 90% of the app’s functionality.

What are the benefits of using blockchain technology?

Low fees

The elimination of middlemen could result in lower product prices and reduced transaction fees. Reduced costs would be particularly noticeable for micropayments, which have been impossibly costly to process via traditional payment methods.

Reduced fraud

Blockchain could prevent identity theft by enabling people to prove their identity through biometrics, encrypted data or digital signatures. It could also eliminate the risk of credit card fraud by removing sensitive information from payments.

Blocking counterfeit goods

Each purchase with a blockchain platform will be recorded on a distributed ledger which can be used to identify counterfeit products.

No chargebacks

Since blockchain payments are irreversible, merchants would no longer have to deal with charge.

The blockchain is an incredible new technology, and we are on the cusp of what could be a truly revolutionary shift in the technological landscape. However, as we’ve seen, there are also some potential drawbacks to consider. The question remains: will the blockchain take hold, or will it fall to the wayside with even more hyperbolic cryptocurrency bubbles? At the moment, only time will tell.



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