What is a blockchain and how do blockchains work?
Cryptocurrencies like Bitcoin and Ethereum are powered by a technology called a blockchain. In its most basic form, a blockchain is a list of transactions that anyone can view and verify. The Bitcoin blockchain, for example, contains a record of every time a person has sent or received bitcoin. Cryptocurrencies and the blockchain technology that powers them make it possible to transfer value online without the need of an intermediary like a bank or credit card company.
- Another way that people often describe blockchain is that it is a ledger (sometimes you will hear the terms “distributed ledger” or “immutable ledger”), which is similar to a bank’s balance sheet. Like a bank’s ledger, the blockchain tracks all the money that comes in goes out, and passes through the network.
- But unlike a bank’s books, a crypto blockchain is not maintained by any individual or organization, including banks and governments. In fact, it’s not centralized at all. Instead, it’s secured by a large network of peer-to-peer computers running open-source software. The network constantly checks and secures the accuracy of the blockchain.
- Almost all cryptocurrencies, including Bitcoin, Ethereum, and Litecoin, are secured through blockchain networks. This means that their accuracy is constantly checked by enormous computing power.
- The list of transactions contained in the blockchain is fundamental for most cryptocurrencies because it allows secure payments to be made between people who do not know each other without having to go through a third-party verifier like a bank.
- Due to the cryptographic nature of these networks, payments through the blockchain can be more secure than standard debit/credit card transactions. When making a Bitcoin payment, for example, you don’t need to provide sensitive information. This means that there is virtually no risk that your financial information will be compromised or that your identity will be stolen.
- Blockchain technology is also exciting because it has many uses beyond cryptocurrency. Blockchains are used to explore medical research, improve the accuracy of health records, streamline supply chains, and much more.
Some key questions about blockchains
What is the main advantage of blockchains over the old financial system?
Think about the part of your financial life online, from shopping to investing – and how each of those transactions requires a bank or a credit card company or a payment processor like Paypal in the middle. Blockchains allow these transactions to take place without an intermediary, and without the additional costs and complexity that accompany them.
Is Bitcoin a blockchain?
Bitcoin is a cryptocurrency. And the underlying technology that makes it possible and unique is a blockchain.
How many types of blockchains are there?
Thousands, from those who power Bitcoin, Litecoin, Ethereum, and countless other digital currencies to a growing number that has nothing to do with digital money.