What is blockchain?

An introduction into how blockchains work and why they're so revolutionary

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Edward Wilson

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Quick summary

A blockchain is a decentralized database across a peer-to-peer network. Blockchains may sound complicated, but the reality is that they’re not. This article will explain what blockchains are, how they work and why they’re exciting.

What is a blockchain?

Blockchains are decentralized databases distributed across a peer-to-peer network. This means no one person or institution has control of the network. Instead, computers from across the world work together to create a trusted record of transactions that anyone can view and verify.  

The information in a blockchain gets stored on “blocks”. These blocks link together chronologically, forming a metaphorical chain of blocks. Hence the name blockchain.

Each block contains three things:

  1. Transaction data: This is the information about the sender, the receiver, the amount exchanged, and at what time. For example, Bob sends 1 ETH to Alice on 1/03/2021 at 00:00 for her birthday.
  2. A cryptographic hash: This is a unique string of letters and numbers used to identify the data in the block. If the data in the block changes, so does the hash.
  3. A cryptographic hash of the previous block: Every time a new block gets added to the blockchain, it will contain the data of the previous blocks, identified through their unique hash. The only block not to have this is the first block in the chain known as the ‘genesis block’ as there is no previous block information.
Image shows what a block in a blockchain looks like.

Credit: Matthäus Wander

How do blockchains work?

Blockchains need to form a consensus on the network so that the data is trusted and verifiable. This is referred to as the ‘consensus mechanism’. Most cryptocurrencies like Bitcoin and Ethereum use Proof of Work (PoW). The main alternative is Proof of Stake (PoS) which is what Ethereum will upgrade to with ETH 2.0.

This is how the consensus mechanisms work:

Proof of Work

Computers known as ‘miners’ solve cryptographic problems to produce blocks. The miner that solves the problem first, shares the solution with others on the network. If the other miners on the network agree that the solution is correct, then a new block gets added to the blockchain. As a reward for getting the solution, the miner receives some cryptocurrency and any transaction fees for that block.

Image displays how Proof of Work consenus mechanism works

Credit: Ledger

Proof of Stake

instead of using miners, Proof of Stake uses randomly selected validators. A validator is someone that ‘stakes’ the blockchains native cryptocurrency to approve and produce blocks. Staking locks a validator into the blockchain and if they operate irresponsibly or maliciously they lose a percentage of their stake through slashing penalties.

Image displays how validators work in a Proof of Stake blockchain

Credit: Ledger

What are the advantages of using a blockchain?

There is a wide range of advantages of using blockchains. Here are just a few:

  • Permissionless: Anyone, anywhere at any time can send cryptocurrency to whoever has a wallet without someone being able to stop them.
  • Privacy: Blockchains don’t need your personal identification to use them.
  • Control: You have full control over your funds.
  • Decentralization: There is no central point of failure that will bring the network down.  also have no central point of failure operating globally across any border.

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Further Resources

The Bitcoin Whitepaper

The Ethereum Whitepaper

Crypto Library, a curated collection of cryptocurrency resources

Crypto reading for beginners: a chronological list of key articles

What is BLOCKCHAIN? The best explanation of blockchain technology