What is blockchain technology?
Cryptocurrencies are on the rise, and there are many people who want to invest in them. But to profit from these investments and mitigate risks related to them, you must know at least the basics about their technological aspects. One of the most mentioned concepts in this segment of technology is blockchain. In this article, you will find out, what blockchain technology is and why it is important for the world of cryptocurrency.
Blockchain is a technology. Bitcoin is just the first global manifestation of its potential.Mark Koenigsberg, founder of Bitcoin Chaser
So, what is blockchain?
At its core, blockchain is a technology of a distributed database used for storing data. Due to its decentralized nature, it is more secure than other types of databases, and it is difficult to hack, steal or forge data because each entry exists on many computers. There isn’t any centralized storage of data – each entry is copied, distributed, and verified by many users (called nodes), ensuring that all entries are true and correct.
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To explain what blockchain technology is, we can start with its name. The name “blockchain” by itself describes the basic principle of the technology. Imagine a digital ledger that consists of many individual “blocks” of information. They all can be described as a “chain” because each block is attached to already existing ones. After new information was added, all instances of the digital ledger are updated, so they all contain the same information.
The security of the blockchain is based on how these blocks are created. Each transaction is verified by many nodes in the network, and only after such verification, a new block will be added up to the chain. This eliminates the possibility of spending one coin several times or of many other fraudulent activities. The structure of the blockchain also means that the digital ledger contains the history of all transactions, from the very first one to the present day. As a consequence, the transactions are irreversible: after a new block was stored in a ledger, there is no way to erase it, meaning it is impossible to forge transaction records or erase a transaction.
Benefits of blockchain
Answering a question, what blockchain is good for, one could bring up many examples. Due to its structure and principle of operation blockchain has many advantages:
- The transactions are recorded with strict accuracy. As each transaction is verified by multiple nodes, there are much fewer risks of errors in the ledger (for example, writing the money off or double-spending by mistake).
- The system does not need any intermediaries to function. To use blockchain-based currencies and assets people do not need any intermediary or centralized institution, like a bank or a regulator. This makes a system more reliable and sustainable.
- High-level security. Theoretically, if a hacker would attempt to enter a false transaction or affect the system in any other malicious way, they would need to hack every node where the blockchain is stored. Methods of verification used by major cryptocurrencies make it almost impossible.
How is blockchain used?
Describing what blockchain is used for, you will have to mention many different areas. It provides a core, upon which decentralized financial tools, NFTs, and cryptocurrencies are built. There are even attempts to use blockchain in other services, for example, in voting systems.
Blockchain in cryptocurrencies
But cryptocurrencies remain the most common case of using blockchain. If you have ever bought, sold, or transferred any of the major cryptocurrencies, like Bitcoin or Ethereum, you were using blockchain technology. Most people learn, what a cryptocurrency blockchain is, through the experience of using Bitcoin, Ethereum, or some other crypto coin. The data about each transaction is stored in a blockchain, and this is the reason why cryptocurrencies are considered highly secure.
Blockchain technology is now on the rise. It is constantly improved and developed, to make it even more secure and less energy-consuming. Now, when you know what blockchain is and how it works, you can see that its future looks very promising. But at the same time, it is hard to predict if it will be adopted more widely in the next few years – it depends on government policies, technology development, and other circumstances. Investing in blockchain remains a risky option, albeit with a possibility of bringing high profits in the future.