With the recent trials and tribulations of Bitcoin making international news, the subject of cryptocurrencies is hotter than it has ever been. However, it’s the technology behind cryptocurrencies that really excites us. The concept of the blockchain is by no means new. Neither is Bitcoin for that matter. Cryptocurrencies have existed about a decade. It’s only recently that many people have become aware of them as an alternative to regular currencies.
But with that awareness comes a newfound curiosity. With this article, we aim to help you understand blockchain technology and why it’s important to more industries than just the financial markets.
The blockchain technology was invented alongside Bitcoin in 2008. Let’s discuss blockchains in relation to how they work with cryptocurrencies.
Each cryptocurrency has a blockchain behind it. This chain is a record of every transaction that takes place using that cryptocurrency.
With cryptocurrency, this usually means that a new block gets created whenever somebody trades a unit of their currency somewhere else. For example, somebody may exchange a Bitcoin for United States dollars. This creates a block.
These blocks stack on top of each other. The first block is the first transaction that took place. The final one is the last transaction that took place. In between is every transaction that has ever taken place, in order.
If you have a cryptocurrency, you have the key to that currency’s position on the blockchain. You’ll keep this private key in an account. You also have a public account that others use to transfer to you.
Your private key is a double-edged sword. On one hand, it ensures that nobody else could ever possibly have access to your cryptocurrency. On the other hand, losing your key means losing the address of your block. Because nobody else has the key, that block ends up being lost forever.
How it Helps with Security
We mentioned how your private key ensures that nobody else could possibly have access to your block.
This isn’t strictly true. Everybody can see your block. But it’s only you who has any control over it. Nobody else can do anything with it.
That brings us to one of the key concepts behind the blockchain – it’s a decentralised technology. Technically, everybody has access to it. Everybody can see the block and thus see every transaction that has taken place on it. Everybody can also get involved with the blockchain.
In terms of cryptocurrencies, this adds an extra layer of security to your transaction. Others can’t see who you are or who you transferred currency to or from. However, they can see a record of the transaction taking place. This goes for every transaction because they all create a new block on the blockchain.
As a result, you don’t need a bank or other institution to verify the transaction. Cutting out this middleman, combined with your private key, practically eliminates the possibility of fraud. No other person can make a transaction using your currency. Moreover, the decentralised nature of the blockchain means it’s impossible the information to get lost.
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Those are the basics of how a blockchain works. Next time, we’ll look at look at some of the ways it can be used in industries beyond financial.